k17 Sol Ch18

CHAPTER 18
Revenue Recognition
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Brief Concepts
Topics Questions Exercises Exercises Problems for Analysis
1. Current Environment; 1, 2, 3, 8 1, 2, 3
5-Step Model. 4, 5, 6
2. Contracts. 7 1, 2, 3, 4 1, 2, 3 1, 2 1
3. Performance Obligations 9, 10, 11 5, 19, 20
4. Transaction Price 8, 12, 18 6, 7, 8 4, 6, 7 4, 5 1
5. Variable Consideration; 8, 13, 14, 5, 6, 7, 8, 9, 4, 5 3, 4, 6, 7, 5

Time value; Non-Cash 15, 16, 17 10, 11, 12 8
consideration, consideration
paid to customer
6. Allocate transaction price to 11, 12,18, 13, 14, 15 1, 2, 3, 4, 5

performance obligations. 19
7. Satisfying Performance 5, 20, 21, 13, 14, 15, 16, 17, 18, 1, 2, 3, 5, 3, 4, 6, 7, 8
Obligations – transfer 22, 23, 24, 16, 17, 18, 19, 20 , 21, 6, 7, 8
control: Returns; 25, 26, 27, 19, 20 22, 23, 24,
repurchases; Bill and Hold; 28, 29 25, 26, 27
Principal-agent;
consignments; Warranties;
Upfront fees.
8. Presentation, Contract 30, 31, 19, 21 28, 29, 30, 6, 7

modifications Contract 32, 33 31, 32
Costs, Collectibility.
*9. Long-Term Contracts 34, 35, 22, 23, 24 33, 34, 35, 9, 10, 11 8, 9
36, 37 36, 37
*10. Franchising. 38, 39 25 38, 39 12
*This material is dealt with in an Appendix to the chapter.
Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only) 18-1
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Brief Concepts for

Questions
Learning Objectives Exercises Exercises Problems Analysis
1. Understand the 1, 2, 3 1, 2, 3 1, 2, 3 1
fundamental
concepts related to
revenue
recognition and
measurement.
2. Understand and 4, 5, 6, 7, 8, 3, 4, 5, 6, 7, 2, 4, 5, 6, 7, 1, 2, 3, 4, 5, 2, 3, 4, 8
apply the five-step 9, 10, 11, 8, 9, 10, 11, 8, 9, 10, 11 8, 9, 10
revenue process. 12, 13, 14, 12
15, 16, 17,
18, 21, 22
3. Apply the five-step 23, 24, 25, 11, 12, 13, 8, 9, 10, 11, 1, 2, 3, 4, 5, 5, 6, 7
process to major 26, 27, 28, 14, 15, 16, 12, 13, 14, 6, 7, 8
revenue 29 17, 18, 20 15, 16, 17,
recognition issues. 18, 19, 20,
21, 22, 23,
24, 25, 26,
27
4. Describe 30, 31, 32, 19, 21 28, 29, 30, 2, 3, 4, 5 6, 7

presentation and 33 31, 32
disclosure
regarding revenue.
*5. Apply the 34, 35, 36 22 33, 34, 35, 9, 10, 11 9

percentage-of- 36, 37
completion method
for long-term
contracts.
*6. Apply the 34, 35 23 36, 37 9, 10, 11

completed-contract
method for long-
term contracts.
*7. Identify the proper 37 24 10, 11

accounting for
losses on long-
term contracts.
*8. Explain revenue 38, 39 25 38, 39 12

recognition for
franchises.
18-2 Copyright © 2019 WILEY Kieso, Intermediate Accounting, 17/e, Solutions Manual (For Instructor Use Only)
ASSIGNMENT CHARACTERISTICS TABLE
Level of Time
Item Description Difficulty (minutes)
E18.1 Fundamentals of Revenue Recognition Simple 10-15
E18.2 Fundamentals of Revenue Recognition Moderate 10-15
E18.3 Existence of a Contract. Moderate 10–15
E18.4 Determine Transaction Price Moderate 20-25
E18.7 Determine Transaction Price Moderate 15–20
E18.8 Determine Transaction Price Moderate 15–20
E18.9 Determine Transaction Price. Moderate 20–25
E18.10 Allocate Transaction Price. Complex 25-30
E18.11 Allocate Transaction Price. Moderate 20-25
E18.12 Allocate Transaction Price. Simple 10-15
E18.15 Allocate Transaction Price. Simple 10-15
E18.16 Sales with Returns Moderate 20-25
E18.17 Sales with Returns Moderate 15-20
E18.18 Sales with Allowances Moderate 20-25
E18.19 Sales with Returns. Moderate 15–20
E18.20 Sales with Returns. Moderate 25-30
E18.21 Sales with Returns. Moderate 15–20
E18.22 Sales with Repurchase. Moderate 20–25
E18.23 Repurchase Agreement Moderate 10–15
E18.24 Bill and Hold. Moderate 10–15
E18.25 Consignment Sales. Moderate 5–10
E18.26 Warranty Arrangement. Moderate 10–15
E18.27 Warranty Arrangement. Moderate 15–20
E18.28 Existence of a Contract. Moderate 10–15
E18.29 Contract Modification. Moderate 20–25
E18.30 Contract Modification Moderate 20–25
E18.31 Contract Costs. Simple 10–15
E18.32 Contract Costs, Collectibility. Moderate 20–25
*E18.33 Recognition of Profit on Long-Term Contracts. Moderate 20–25
*E18.34 Analysis of Percentage-of-Completion Financial Statements. Simple 10–15
*E18.35 Gross Profit on Uncompleted Contract. Moderate 10–15
*E18.36 Recognition of Revenue on Long-Term Contract and Entries. Moderate 15–20
*E18.37 Recognition of Profit and Balance Sheet Amounts for Long- Moderate 15–25
Term Contracts.
*E18.38 Franchise Entries. Moderate 20–25
*E18.39 Franchise fee, initial down payment. Moderate 15–20
P18.1 Allocate Transaction Price, Upfront Fees. Moderate 30–35

P18.2 Allocate Transaction Price, Modification of Contract. Moderate 20–25
ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Level of Time
Item Description Difficulty (minutes)
P18.3 Allocate Transaction Price, Discounts, Time Value. Moderate 30–35
P18.4 Allocate Transaction Price, Discounts, Time Value. Complex 35–40
P18.5 Allocate Transaction Price, Returns, and Consignments Complex 35–40
P18.6 Warranty, Customer Loyalty Program. Moderate 25–30
P18.7 Customer Loyalty Program Moderate 30–35
P18.8 Time Value, Gift cards, Discounts. Moderate 30–35
*P18.9 Recognition of Profit on Long-Term Contract. Complex 30–40
*P18.10 Long-Term Contract with Interim Loss. Moderate 20–25
*P18.11 Long-Term Contract with an Overall Loss. Complex 40–50
*P18.12 Franchise Revenue. Moderate 35–45
CA18.1 Five-Step Revenue Process. Moderate 20–30

CA18.2 Satisfying Performance Obligations. Moderate 20–30
CA18.3 Recognition of Revenue—Theory. Moderate 25–30
CA18.4 Recognition of Revenue—Theory. Moderate 25–30
CA18.5 Discounts Complex 20–25
CA18.6 Recognition of Revenue from Subscriptions. Complex 35–45
CA18.7 Revenue Recognition—Bonus points. Moderate 25–30
CA18.8 Revenue Recognition—Membership Fees, Ethics. Moderate 20–25
*CA18.9 Long-term Contract—Percentage-of-Completion. Moderate 20–25
ANSWERS TO QUESTIONS
1. Most revenue transactions pose few problems for revenue recognition. This is because, in many
cases, the transaction is initiated and completed at the same time. However, due to the
complexity of some transactions, many believe the revenue recognition process is increasingly
complex to manage, more prone to error, and more material to financial statements compared to
any other area of financial reporting. In addition, even with the many standards, no
comprehensive guidance was provided for service transactions. As a result, the FASB and IASB
have indicated that the present state of reporting for revenue is unsatisfactory and the Boards
issued a standard, “Revenue from Contracts with Customers”. This new standard provides a new
approach for how and when companies should report revenue. The standard is comprehensive
and applies to all companies. As a result, comparability and consistency in reporting revenue
should be enhanced.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving
2. GAAP had numerous standards related to revenue recognition, but many believed the standards
were often inconsistent with one another.
LO: 1, Bloom: K, Difficulty: Simple, Time: 1, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
3. The revenue recognition principle indicates that revenue is recognized in the accounting period
when a performance obligation is satisfied. That is, a company recognizes revenue to depict the
transfer of goods or services to customers in an amount that reflects the consideration that it
receives, or expects to receive, in exchange for those goods or services.
LO: 1, 2, Bloom: K, Difficulty: Simple, Time: 1, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving
4. The five steps in the revenue recognition process are:
1. Identify the contract(s) with customers.

2. Identify the separate performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the separate performance obligations.
5. Recognize revenue when each performance obligation is satisfied.
LO: 1, 3, Bloom: K, Difficulty: Simple, Time: 1, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
5. Change in control is the deciding factor in determining when a performance obligation is satisfied.
Control is transferred when the customer has the ability to direct the use of and obtain
substantially all the remaining benefits from the asset or service. Control is also indicated if the
customer has the ability to prevent other companies from directing the use of, or receiving the
benefit, from the asset or service.
LO: 1, 2, Bloom: K, Difficulty: Moderate, Time: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
6. Revenues are recognized generally as follows:
(a) Revenue from selling products—date of delivery to customers.

(b) Revenue from services performed—when the services have been performed (performance
obligation satisfied).
(c) Revenue from permitting others to use company assets—as time passes or as the assets
are used.
(d) Revenue from disposing of assets other than products—at the date of sale.
LO: 2, Bloom: C, Difficulty: Moderate, Time: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
Questions Chapter 18 (Continued)
7. The first step in the revenue recognition process is the identification of a contract or contracts
with the customer. A contract is an agreement between two or more parties that creates
enforceable rights or obligations. That is, the contract identifies the performance obligations in a
revenue arrangement. Contracts can be written, oral, or implied from customary business
practice. In some cases, there may be multiple contracts related to the transaction, and
accounting for each contract may or may not occur, depending on the circumstances. These
situations often develop when not only a product is provided but some type of service is
performed as well.
8. No entry is required on October 10, 2020, because neither party has performed on the contract.
That is, neither party has an unconditional right as of October 10, 2020. On December 15, 2020,
Executor delivers the product and therefore should recognize revenue on that date as it satisfied
its performance obligation on that date.
The journal entry to record the sales revenue and related cost of goods sold is as follows:
December 15, 2020
Notes Receivable ................................................ 5,000

Cash .................................................................... 5,000
Sales Revenue ........................................ 10,000
Cost of Goods Sold ............................................. 6,500

Inventory .................................................. 6,500
LO: 2, Bloom: AP, Difficulty: Simple, Time: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving
9. A performance obligation is a promise in a contract to provide a product or service to a customer.

This promise may be explicit, implicit, or possibly based on customary business practice. To
determine whether a performance obligation exists, the company must determine whether the
customer can benefit from the good or service on its own or together with other readily available
resources.
LO: 1, 2, Bloom: K, Difficulty: Moderate, Time: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving
10. To determine whether a performance obligation exists, the company must provide a distinct
product or service to the customer. To determine whether a company has to account for multiple
performance obligations, the company’s promise to sell the good or service to the customer must
be separately identifiable from other promises within the contract (that is, the good or service
must be distinct within the contract). In other words, the objective is to determine whether the
nature of a company’s promise is to transfer individual goods and services to the customer or to
transfer a combined item (or items) for which individual goods or services are inputs.
LO: 1, 2, Difficulty: Simple, Time: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
11. In this situation, it appears that Engelhart has two performance obligations: (1) one related to
providing the tractor and (2) the other related to the GPS services. Both are distinct (they can be
sold separately) and are not interdependent.
LO: 1, 2, Bloom: C, Difficulty: Moderate, Time: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving
12. The transaction price is the amount of consideration that a company expects to receive from a
customer in exchange for transferring goods and services. The transaction price in a contract is
often easily obtained because the customer agrees to pay a fixed amount to the company over a
short period of time. In other contracts, companies must consider the following factors:
(1) Variable consideration, (2) Time value of money, (3) Noncash consideration, and
(4) Consideration paid or payable to customer.
13. Variable consideration (when the price of a good or service is dependent on future events),
includes such elements as price or volume discounts, rebates, credits, performance bonuses, or
royalties. A company estimates the amount of variable consideration it will receive from the
contract to determine the amount of revenue to recognize. Companies use either (1) the
expected value, which is a probability weighted amount, or (2) the most likely amount in a range
of possible amounts to estimate variable consideration. Companies select among these two
methods based on which approach better predicts the amount of consideration to which a
company is entitled.
14. The transaction price should include management’s estimate of the amount of consideration to
which the entity will be entitled. Given the multiple outcomes and probabilities available based on
prior experience, the probability-weighted method is the most predictive approach for estimating
the variable consideration. In this situation:
25% chance of $421,000 if by February 1 [.25 X ($400,000 + $21,000)] = $ 105,250
25% chance of $414,000 if by February 8 [.25 X ($421,000 - $7,000)] = 103,500
25% chance of $407,000 if by February 15 [.25 X ($414,000 - $7,000)] = 101,750
25% chance of $400,000 if after February 15 [.25 X ($407,000 - $7,000)] = 100,000
$ 410,500
Thus, the total transaction price is $410,500 based on the probability-weighted estimate.
LO: 2, Bloom: AP, Difficulty: Moderate, Time: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
15. Allee should only allocate variable consideration to the performance obligation if it is reasonably
assured that it will be entitled to that amount. In this case, it does not have experience with
similar contracts and is not able to estimate the cumulative amount of revenue. Allee should not
recognize revenue at this time. Allee is constrained in recognizing variable consideration as there
might be a significant reversal of revenue previously recognized.
LO: 2, Bloom: AP, Difficulty: Simple, Time: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
16. In measuring the transaction price, companies make the following adjustment for:
(a) Time value of money - When a sales transaction involves a significant financing component
(that is, interest is accrued on consideration to be paid over time), the fair value (transaction
price) is determined either by measuring the consideration received or by discounting the
payment using an imputed interest rate. The imputed interest rate is the more clearly
determinable of either (1) the prevailing rate for a similar instrument of an issuer with a
similar credit rating, or (2) a rate of interest that discounts the nominal amount of the
instrument to the current sales price of the goods or services. The company will report the
effects of the financing either as interest expense or interest revenue.
(b) When noncash consideration is involved, revenue is generally recognized on the basis of
the fair value of what is received. If the fair value cannot be determined, then the company
should estimate the selling price of the goods delivered or services performed and recognize
this amount as revenue. In addition, companies sometimes receive contributions (donations,
gifts). A contribution is often some type of asset (such as securities, land, buildings or use of
facilities) but it could be the forgiveness of debt. Similarly, this consideration should be
recognized as revenue based on the fair value of the consideration received.
17. Any discounts or volume rebates should reduce consideration received and reduce revenue
recognized.
LO: 2, Bloom: K, Difficulty: Simple, Time: 1, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving
18. If an allocation of transaction price to various performance obligations is needed, the allocation is
based on what the company could sell the good or service on a standalone basis (referred to as
the standalone selling price). If this information is not available, companies should use their best
estimate of what the good or service might sell for as a standalone unit. The three approaches
for estimating standalone selling price are: (1) Adjusted market assessment approach; (2)
Expected cost plus a margin approach, and (3) Residual approach.
LO: 2, Bloom: K, Difficulty: Moderate, Time: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
19. Since each element sells separately and has a separate standalone selling price, the equipment,
installation, and training are three separate performance obligations.
The total revenue of $80,000 should be allocated to the three performance obligations based on
their relative standalone selling price. Thus, the total estimated selling price is $100,000*
($90,000 + $7,000 + $3,000). The allocation is as follows:
Equipment ($90,000 ÷ $100,000) X $80,000 = $72,000.
Installation ($7,000 ÷ $100,000) X $80,000 = $5,600.
Training ($3,000 ÷ $100,000) X $80,000 = $2,400.
20. A company satisfies its performance obligation when the customer obtains control of the good or
service. Indications that the customer has obtained control are:
1. The company has a right to payment for the asset.
2. The company transferred legal title to the asset.
3. The company transferred physical possession of the asset.
4. The customer has significant risks and rewards of ownership.
5. The customer has accepted the asset.
21. Companies satisfy performance obligations either at a point in time or over a period of time.
Companies recognize revenue over a period of time if one of the following three criteria is met:
1. The customer receives and consumes the benefits as the seller performs.
2. The customer controls the asset as it is created or enhanced (e.g., a builder constructs a
building on a customer’s property).
3. The company does not have an alternative use for the asset created or enhanced (e.g., an
aircraft manufacturer builds specialty jets to a customer’s specifications) and either (a) the
customer receives benefits as the company performs and therefore the task would not need
to be re-performed, or (b) the company has a right to payment and this right is enforceable.
22. A company recognizes revenue from a performance obligation over time by measuring the
progress toward completion. The method selected for measuring progress should depict the
transfer of control from the company to the customer. The most common are the cost-to-cost and
units-of-delivery methods. The objective of these methods is to measure the extent of progress in
terms of costs, units, or value added. Companies identify the various measures (costs incurred,
labor hours worked, tons produced, floors completed, etc.) and classify them as input or output
measures. Input measures (costs incurred, labor hours worked) are efforts devoted to a contract.
Output measures (with units of delivery measured as tons produced, floors of a building
completed, miles of a highway completed) track results. Neither is universally applicable to all
long-term projects. Their use requires the exercise of judgment and careful tailoring to the
circumstances. The most popular input measure used to determine the progress toward
completion is the cost-to-cost basis. Under this basis, a company measures the percentage of
completion by comparing costs incurred to date with the most recent estimate of the total costs
required to complete the contract.
23. To account for sales with rights of return, (and for some services that are provided subject to a
refund), companies generally recognize all of the following:
a. Revenue for the transferred products in the amount of consideration to which seller is
reasonably assured to be entitled considering the products expected to be returned or
allowances granted.
b. An asset (and corresponding adjustment to cost of goods sold) for its right to recover
inventory from the customer.
If the company is unable to reliably estimate the level of returns, it should not report revenue
until the returns are predictable.
24. If a company sells a product in one period and agrees to buy it back in the next period, legal title
may have transferred, but the economic substance of the transaction is that the seller retains the
risks of ownership. When companies enter into repurchase agreements, they are allowed to
transfer an asset to a customer but have an unconditional (forward) obligation or unconditional
right (call option) to repurchase the asset at a later date. In these situations, the question is
whether the company sold the asset. Generally, companies report these transactions as a
financing (borrowing). That is, if the company has a forward obligation or call option to
repurchase the asset for an amount greater than or equal to its selling price, then the
transaction is a financing transaction.
25. Bill-and-hold sales result when the buyer is not yet ready to take delivery but the buyer takes title
and accepts billing. Revenue is recognized at the time title passes if all of the following criteria
are met and the control provisions related to revenue recognition are met:
(a) The reason for the bill-and-hold arrangement must be substantive.

(b) The product must be identified separately as belonging to the customer.
(c) The product currently must be ready for physical transfer to the customer.
(d) The seller cannot have the ability to use the product or to direct it to another customer.
26. In a principal-agent relationship, the principal’s performance obligation is to provide goods or

perform services for a customer. The agent’s performance obligation is to arrange for the
principal to provide these goods or services to a customer. In a principal-agent relationship,
amounts collected on behalf of the principal are not revenue of the agent. The revenue for the
agent is the amount of the commission it receives (usually a percentage of the selling price or
total revenue).
27. A sale on consignment is the shipment of merchandise from a manufacturer (or wholesaler) to a
dealer (or retailer) with title to the goods and the risk of sale being retained by the manufacturer
who becomes the consignor. The consignee (dealer) is expected to exercise due diligence in
caring for the merchandise and the dealer has full right to return the merchandise. The
consignee receives a commission upon the sale and remits the balance of the cash collected to
the consignor.
The consignor recognizes a sale and the related revenue upon notification of sale from the
consignee and receipt of the cash. The consigned goods are carried in the consignor’s inventory,
not the consignee’s, until sold.
28. The two types of warranties are:
a. Warranties that the product meets agreed-upon specifications in the contract at the time the
product is sold. This type of warranty is included in the sale price of the company’s product
and is often referred to as an assurance-type warranty.
b. Warranties that provide an additional service beyond the assurance-type warranty. This
warranty is not included in the sale price of the product and is referred to as a service-type
warranty.
Companies do not record a separate performance obligation for assurance-type warranties.
These types of warranties are nothing more than a quality guarantee that the good or service is
free from defects at the point of sale. These types of obligations should be expensed in the
period the goods are provided or services performed. In addition, the company should record a
warranty liability. The estimated amount of the liability includes all the costs that the company will
incur after sale and that are incident to the correction of defects or deficiencies required under
the warranty provisions.
Warranties that provide the customer with service beyond fixing defects that existed at the time of
sale represent a separate service and are an additional performance obligation. As a result,
companies should allocate a portion of the transaction price to this performance obligation. The
company recognizes revenue in the period that the service type warranty is in effect.
29. The total transaction price is $420* [$300 + ($5 X 24 months)]. That is, Campus Cellular is
providing a service in the second year without receiving an upfront fee. Thus, the upfront fee
should be recognized as revenue over two periods. As a result, Campus Cellular recognizes
revenue of $210 ($420* ÷ 2) in both year 1 and year 2.
30. Under the asset-liability model for recognizing revenue, companies recognize assets and
liabilities according to the definitions of assets and liabilities in a revenue arrangement. For
example, when a company has a right to consideration for meeting a performance obligation, it
has a right to consideration from the customer and therefore has a contract asset. A contract
liability is a company’s obligation to transfer goods or services to a customer for which the
company has received consideration from the customer. Thus, if the customer performs first, by
prepaying for the product, then the seller has a contract liability. Companies must present these
contract assets and contract liabilities on their balance sheet. Contract assets are of two types:
(a) Unconditional rights to receive consideration because the company has satisfied its
performance obligation with the customer, and (b) Conditional rights to receive consideration
because the company has satisfied one performance obligation, but must satisfy another
performance obligation in the contract before it can bill the customer. Companies should report
unconditional rights to receive consideration as a receivable on the balance sheet. Conditional
rights on the balance sheet (e.g., unbilled receivables) should be reported separately as contract
assets.
31. A contract modification occurs if a company changes the contract terms during the term of the
contract. When a contract is modified, the company must determine whether a new performance
obligation has occurred or whether it is a modification of the existing performance obligation. If it
is a modification of an existing performance obligation, then the change is generally reported
prospectively or as a cumulative effect adjustment to revenue, depending on the circumstances.
If the modification results in a separate performance obligation, then this performance obligation
should be accounted for separately.
LO: 4, Difficulty: Simple, Time: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
32. (a) Companies divide fulfillment costs (contract acquisition costs) into two categories:
(1) those that give rise to an asset, and
(2) those that are expensed as incurred. Companies recognize an asset for the incremental
costs if these costs are incurred to obtain a contract with a customer. In other words,
incremental costs are costs that a company would not incur if the contract had not been
obtained (for example, selling commissions). Other examples are:
(a) Direct labor, direct materials, and allocation of costs that relate directly to the contract
(such as costs of contract management and supervision, insurance, and depreciation of
tools and equipment), and
(b) Costs that generate or enhance resources of the company that will be used in
satisfying performance obligations in the future. Costs include intangible design or
engineering costs that will continue to benefit in the future. Companies capitalize costs
that are direct, incremental, and recoverable (assuming that the contract period is more
than one year).
(b) Collectibility – Any time a company sells a product or performs a service on account, a
collectibility issue occurs. Collectibility refers to a customer’s credit risk, that is, the risk that
a customer will be unable to pay the amount of consideration in accordance with the
contract. Under the revenue guidance—as long as a contract exists (it is probable that the
customer will pay)—the amount recognized as revenue is not adjusted for customer credit
risk. Thus, companies report the revenue gross (without consideration of credit risk) and
then present an allowance for any impairment due to bad debts recognized initially and
subsequently in accordance with the respective bad debt guidance). An impairment related
to bad debts is reported as an operating expense in the income statement. Whether a
company will get paid for satisfying a performance obligation is not a consideration in
determining revenue recognition.
LO: 4, Bloom: K, Difficulty: Moderate, Time: 6-8, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
33. The disclosure requirements for revenue recognition are designed to help financial statement
users understand the nature, amount, timing, and uncertainty of revenue and cash flows arising
from contracts with customers. To achieve that objective, companies disclose qualitative and
quantitative information about all of the following:
• Contracts with Customers - These disclosures include the disaggregation of revenue,
presentation of opening and closing balances in contract assets and contract liabilities, and
significant information related to their performance obligations.
• Significant judgments. These disclosures include judgments and changes in these judgments
that affect the determination of the transaction price, the allocation of the transaction price,
and the determination of the timing of revenue.
• Assets recognized from costs incurred to fulfill a contract. These disclosures include the
closing balances of assets recognized to obtain or fulfill a contract, the amount of
amortization recognized, and the method used for amortization.
*34. For the most part, companies recognize revenue at the point of sale because that is when the
performance obligation is satisfied. Under certain circumstances, companies recognize revenue
over time. The most notable context in which revenue is recognized over time is long-term
construction contract accounting. Long-term contracts frequently provide that the seller (builder)
may bill the purchaser at intervals, as it reaches various points in the project.
A company satisfies a performance obligation and recognizes revenue over time if at least one of
the following three criteria is met:
1. The customer simultaneously receives and consumes the benefits of the entity’s performance
as the entity performs.
2. The company’s performance creates or enhances an asset (for example, work in process)
that the customer controls as the asset is created or enhanced; or
3. The company’s performance does not create an asset with an alternative use. For example,
the asset cannot be used by another customer. In addition to this alternative use element, at
least one of the following criteria must be met:
(a) Another company would not need to substantially re-perform the work the company has
completed to date if that other company were to fulfill the remaining obligation to the
customer.
(b) The company has a right to payment for its performance completed to date, and it
expects to fulfill the contract as promised.
Therefore, if criterion 1 or 2 is met, then a company recognizes revenue over time if it can
reasonably estimate its progress toward satisfaction of the performance obligations. That is, it
recognizes revenues and gross profits each period based upon the progress of the
construction—referred to as the percentage-of-completion method. The rationale for using
percentage-of-completion accounting is that under most of these contracts the buyer and seller
have enforceable rights. The buyer has the legal right to require specific performance on the
contract. The seller has the right to require progress payments that provide evidence of the
buyer’s ownership interest. As a result, a continuous sale occurs as the work progresses.
Companies should recognize revenue according to that progression.
The right to payment for performance completed to date does not need to be for a fixed amount.
However, the company must be entitled to an amount that would compensate the company for
performance completed to date (even if the customer can terminate the contract for reasons
other than the company’s failure to perform as promised). Alternatively, if the criteria for
recognition over time are not met (e.g., the company does not have a right to payment for work
completed to date), the company recognizes revenues and gross profit at a point in time; that is,
when the contract is completed. This approach is referred to as the completed-contract method.
LO: 5, 6, Bloom: K, Difficulty: Moderate, Time: 5-8, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
*35. Under the percentage-of-completion method, income is reported to reflect more accurately the
production effort. Income is recognized periodically on the basis of the percentage of the job
completed rather than only when the entire job is completed. The principal disadvantage of the
completed-contract method is that it may lead to distortion of earnings because no attempt is
made to reflect current performance when the period of the contract extends into more than one
accounting period.
The percentage-of-completion method recognizes revenues, costs, and gross profit as a

company makes progress toward completion on a long-term contract. To defer recognition of
these items until completion of the entire contract is to misrepresent the efforts (costs) and
accomplishments (revenues) of the accounting periods during the contract.
LO: 5, 6, Bloom: K, Difficulty: Simple, Time: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
*36. The methods used to determine the extent of progress toward completion are the cost-to-cost
method and units-of-delivery method. Costs incurred and labor hours worked are examples of
input measures, while tons produced, stories of a building completed, and miles of highway
completed are examples of output measures.
LO: 7, Bloom: C, Difficulty: Moderate, Time: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
*37. The two types of losses that can become evident in accounting for long-term contracts are:
(1) A current period loss involved in a contract that, upon completion, is expected to produce
a profit.
(2) A loss related to an unprofitable contract.
The first type of loss is actually an adjustment in the current period of gross profit recognized on
the contract in prior periods. It arises when, during construction, there is a significant increase in
the estimated total contract costs, but the increase does not eliminate all profit on the contract.
Under the percentage-of-completion method, the estimated cost increase necessitates a current
period adjustment of previously recognized gross profit; the adjustment results in recording a
current period loss. No adjustment is necessary under the completed-contract method because
gross profit is only recognized upon completion of the contract.
Cost estimates at the end of the current period may indicate that a loss will result upon com-
pletion of the entire contract. Under both percentage-of-completion and completed contract
methods, the entire loss must be recognized in the current period.
*38. It is improper to recognize the entire franchise fee as revenue at the date of sale when many of
the services of the franchisor are yet to be performed.
*39. Continuing franchise fees should be reported as revenue when the performance obligations
related to those fees have been satisfied by the franchisor. These revenues are generally
recognized over time as the related product and services are provided. Continuing product sales
would be accounted for in the same manner as would any other product sales.
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 18.1
(a) In applying the 5-step process, it appears that a valid contract exists
between Leno Computers and Fallon Electronics for the following
reasons:
1. The contract has commercial substance—Fallon Electronics has
agreed to pay cash for the computers.
2. The parties have approved the contract and are committed to
perform—Fallon Electronics has made a commitment to purchase
the computers and Leno has approved the selling of the
computers. In fact, Leno has delivered the computers to Fallon.
3. The identification of the rights of the parties—Fallon has the right
to the computers and Leno has the right to payment.
4. The identification of the payment terms—Fallon has agreed to pay
$20,000 within 30 days for the computers.
5. It is probable that the consideration will be collected—although no
cash has yet been paid by Fallon. Fallon has a good credit rating
which indicates that the consideration will be collected.
(b) The contract may not be valid if the contract is wholly unperformed
and each party can unilaterally terminate the contract without
consideration. In addition, if Fallon has a poor credit rating and it is
not probable that the consideration will be collected on the contract, a
valid contract does not exist.
LO: 1, Bloom: AP, Difficulty: Moderate, Time: 5-7, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
BRIEF EXERCISE 18.2
No entry is required on May 10, 2020, because neither party has performed
under the contract and either party may terminate the contract without
compensatory damages. On June 15, 2020, Cosmo delivers the product
and therefore, should recognize revenue as Cosmo satisfies its
performance obligation by delivering the product to Greig.
BRIEF EXERCISE 18.2 (continued)
The journal entry to record the sale and related cost of goods sold is as
follows.
June 15, 2020
Accounts Receivable ......................................................... 2,000

Sales Revenue ............................................................ 2,000
Cost of Goods Sold ........................................................... 1,300

Inventory ..................................................................... 1,300
After receiving the cash payment on July 15, 2020, Cosmo makes the
following entry.
July 15, 2020
Cash .................................................................................... 2,000

Accounts Receivable ................................................. 2,000
BRIEF EXERCISE 18.3
There is one performance obligation in this situation, which is the

providing of the licensed software and custom support together. Both the
software license and the custom customer support services are distinct,
but they are not distinct within the contract. It appears that Hillside’s
objective is to transfer a combined product. That is, the customer support
services are highly interrelated and interdependent with the licensed
software and therefore, these customer support services should be
combined with the licensed software in determining the performance
obligation.
BRIEF EXERCISE 18.4
Three performance obligations exist in this contract—manufacture of the 3-

D printer, installation services and the maintenance services. Destin does
clearly have a performance obligation for the manufacture of the 3-D
printer. Destin may or may not have a performance obligation for the
installation of the 3-D printer as installation can be done by another
company. In other words, there is no indication that customization is
required by Destin. Also, Destin may or may not have a separate
performance obligation for the maintenance agreement, as it can be
provided by other companies. In summary, there are three performance
obligations related to this contract, some of which may end up being
performed by companies other than Destin.
BRIEF EXERCISE 18.5
Ismail accounts for the bundle of goods and services as a single

performance obligation because the goods or services in the bundle are
highly interrelated. Ismail also provides a significant service by integrating
the goods or services into the combined item (that is, the hospital) for
which the customer has contracted. In addition, the goods or services are
significantly modified and customized to fulfill the contract. In other words,
the company’s objective is to transfer a combined item. Revenue for the
performance obligation would be recognized over time by selecting an
appropriate measure of progress toward satisfaction of the performance
obligation.
BRIEF EXERCISE 18.6
The transaction price should include management’s estimate of the amount

of consideration to which the entity will be entitled. Given the multiple
outcomes and probabilities available based on prior experience, the
probability-weighted method is the most predictive approach for estimating
the variable consideration in this situation:
Completion Date Probability Expected Value

August 1 70% chance of $1,150,000 = $ 805,000
August 8 20% chance of $1,100,000 = 220,000
August 15 5% chance of $1,050,000 = 52,500
After August 15 5% chance of $1,000,000 = 50,000
$1,127,500
Thus, the total transaction price is $ 1,127,500 based on the probability-

weighted estimate.
LO: 2, Bloom: AP, Difficulty: Moderate, Time: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving
BRIEF EXERECISE 18.7
(a) In this situation, Nair uses the most likely amount as the estimate -
$1,150,000.
(b) When there is limited information with which to develop a reliable

estimate of completion, then no revenue related to the incentive
should be recognized until the uncertainty is resolved. Therefore, no
revenue is recognized until the completion of the contract, with a
transaction price of $1,000,000.
BRIEF EXERECISE 18.8
(a) Groupo would recognize revenue of $1,000,000 at delivery.
(b) Groupo would recognize revenue of $800,000 at the point of sale.
(c) Groupo would recognize revenue of $464,000 at the point of sale and
recognize interest revenue of $36,000 ($500,000 - $464,000) over the
payment period.
BRIEF EXERCISE 18.9
January 2, 2020
Notes Receivable ...................................................... 11,000

Discount on Notes Receivable ......................... 1,000
Sales Revenue ................................................... 10,000
Cost of Goods Sold ................................................. 6,000

Inventory ........................................................... 6,000
Revenue Recognized in 2020
Sales revenue ............................................................ $ 10,000

Interest revenue ($11,000 – $10,000) ....................... 1,000
Total revenue ..................................................... $ 11,000
BRIEF EXERCISE 18.10
Parnevik should record revenue of $660,000 on March 1, 2020, which is the

fair value of the inventory in this case. Parnevik is also financing this
purchase and records interest revenue on the note over the 5-year period.
In this case, the interest rate is imputed to be 10% ([$660,000/$1,062,937] =
.6209, which is the PV of $1 factor for n = 5, i = 10%). Parnevik records
interest revenue of $55,000 (.10 X $660,000 X 10/12) at December 31, 2020.
(a) The journal entries to record Parnevik’s sale to Goosen Inc. and
related cost of goods sold is as follows.
March 1, 2020
Notes Receivable .............................................. 1,062,937

Discount on Notes Receivable ................. 402,937
Sales Revenue ........................................... 660,000
Cost of Goods Sold ..................................... ….. 400,000

Inventory .................................................... 400,000
(b) Parnevik makes the following entry to record interest revenue for 2020.
December 31, 2020
Discount on Notes Receivable ........................ 55,000

Interest Revenue
(.10 X $660,000 X 10/12) ......................... 55,000
As a practical expedient, companies are not required to reflect the time

value of money to determine the transaction price if the time period for
payment is less than a year.
January income ......................................................... $ 0

February income ($4,000 – $3,000) X .50................. $500
March income ($4,000 – $3,000) X .30) .................... $300
April income ($4,000 – $3,000) X .20)....................... $200
LO: 2, 3, Bloom: AP, Difficulty: Moderate, Time: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
Manual reduces revenue by $6,600 ($110,000 X .06) because it is probable

that it will provide rebates amounting to 6%. As a result, Manual recognizes
revenue of $103,400 ($110,000 - $6,600) in the first quarter of the year.
LO: 2, 3, Difficulty: Simple, Time: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
July 10, 2020
Accounts Receivable ............................................... 700,000

Sales Revenue .................................................. 700,000
Cost of Goods Sold .................................................. 560,000

Inventory ........................................................... 560,000
October 11, 2020
Sales Returns and Allowances ................................ 78,000

Accounts Receivable ........................................ 78,000
Returned Inventory ................................................... 62,400
Cost of Goods Sold
[($560,000 ÷ $700,000) x $78,000] ................ 62,400
October 31, 2020
No entries are needed as the return period has expired.
NOTE TO INSTRUCTOR: Some companies may choose to record sales

revenue net. If sales are recorded net, the entries are as follows.
July 10, 2020
Accounts Receivable ................................................ 700,000

Allowance for Sales Returns and
Allowances (.15 X $700,000) ................... 105,000
Sales Revenue ($700,000 - $105,000) .............. 595,000
Cost of Goods Sold (.80 X $700,000)....................... 560,000

Inventory ............................................................ 560,000
Estimated Inventory Returns (.15 x $560,000) ...... 84,000

Cost of Goods Sold ....................................... 84,000
October 11, 2020
Allowance for Sales Returns and Allowances ....... 78,000

Returned Inventory (.80 X 78,000) ........................... 62,400

Estimated Inventory Returns ........................... 62,400
October 31, 2020
Inventory ($84,000 − $62,400) .................................. 21,600

Estimated Inventory Returns ........................... 21,600
Allowance for Sales Returns and Allowances

($105,000 - $78,000) .......................................... 27,000
Sales Revenue .................................................. 27,000
To reclassify inventory and close out the allowance, as the return period
has expired.
Kristin would recognize in its financial statements the following:
(a) Net sales of $5,800 comprised of sales, $6,000 ($20 X 300) less
sales returns and allowances of $200 ($20 X 10).
(b) An estimated liability for refunds for $200 ($20 refund X 10
products expected to be returned)
(c) The amount recognized in cost of goods sold for 290 (300 – 10)
products is $3,480 ($12 X 290).
When to recognize revenue in a bill-and-hold arrangement depends on the

circumstances. Mills determines when it has satisfied its performance
obligation to transfer a product by evaluating when ShopBarb obtains
control of that product. For ShopBarb to have obtained control of a product
in a bill-and-hold arrangement, all of the following criteria should be met:

(b) The product must be identified separately as belonging to
ShopBarb.
(c) The product currently must be ready for physical transfer to
ShopBarb.
(d) Mills cannot have the ability to use the product or to direct it to
another customer.
In this case, the criteria are assumed to be met. As a result, revenue

recognition should be permitted at the time the contract is signed. Mills
makes the following entry to record the bill and hold sale.
June 1, 2020
Accounts Receivable ................................................ 200,000

Sales Revenue ................................................... 200,000

Inventory ............................................................ 110,000
Mills makes the following entry to record the cash received.
September 1, 2020
Cash ........................................................................... 200,000

If a significant period of time elapses before payment, the accounts

receivable is discounted. In addition, if one of the four conditions is
violated, revenue recognition should be deferred until the goods are
delivered to ShopBarb.
(1)
Cash ........................................................................... 70,000
Accounts Payable (ShipAway Cruise Lines) .... 70,000
(2)
Accounts Payable (ShipAway Cruise Lines) ......... 70,000
Sales Revenue ($70,000 X .06) .................................. 4,200
Cash ............................................................................ 65,800
Cash ..................................................................................... 18,850*

Advertising Expense .......................................................... 500
Commission Expense ($21,500 X .10) .............................. 2,150
Revenue from Consignment Sales ........................... 21,500
*[$21,500 – $500 – ($21,500 X .10)]
Cost of Goods Sold ............................................................ 13,200

Inventory on Consignment
[.60 X ($20,000 + $2,000)] ........................................ 13,200
Amounts Reported in Income

Sales revenue ........................................................... $1,000,000
Warranty Expense .................................................... 40,000
Amounts Reported on the Balance Sheet
Unearned Service Revenue ..................................... $ 12,000

Cash ($1,000,000 + $12,000) .................................... 1,012,000
Warranty Liability ..................................................... 40,000
Because the transaction takes place at the end of the year, which is a
reporting date, warranty expense and warranty liability are reported at their
estimated amounts.
The company recognizes revenue related to the service type warranty over
the two-year period that extends beyond the assurance warranty period
(two years). In most cases, the unearned warranty revenue is recognized
on a straight-line basis and the costs associated with the service type
warranty are expensed as incurred.
No entry is required on May 1, 2020 because neither party has performed
on the contract. On June 15, 2020, Eric agreed to pay the full price and
therefore, Mount has an unconditional right to those funds on that date.
On receiving the cash on June 15, 2020, Mount records the following entry.
June 15, 2020
Cash ........................................................................... 25,000
Unearned Sales Revenue ................................. 25,000
On satisfying the performance obligation on September 30, 2017, Mount
records the following entry
September 30, 2020
Unearned Sales Revenue ......................................... 25,000
Sales Revenue ................................................... 25,000

The initiation fee may be viewed as separate performance obligation
because it provides a renewal option at a lower price than normally
charged. As a result, BlueBox is providing a discounted price in the
subsequent years. This should be reflected in the revenue recognized in all
four periods. In this situation, in the total transaction price is $280 ([($5 X
12) X 3] + $100). In the first year (2020), BlueBox would report revenue of
$70 ($280 ÷ 4). The initiation fee is allocated over the entire four year
period.
In evaluating how to account for the modification, Stengel Co. concludes

that the remaining services to be provided are distinct from the services
transferred on or before the date of the contract modification. In addition,
Stengel has the right to receive an amount of consideration that reflects the
standalone selling price of the reduced menu of maintenance services.
Therefore, Stengel allocates the new transaction price of $80,000 to the
third year of service. In effect, Stengel should account for this modification
as a termination of the original contract and the creation of a new contract.
LO: 4, Bloom: C, Difficulty: Simple, Time: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
*BRIEF EXERCISE 18.22

Construction in Process .......................................... 1,700,000
Materials, Cash, Payables. ............................... 1,700,000
Accounts Receivable ............................................... 1,200,000
Billings on Construction in Process ............... 1,200,000
Cash ........................................................................... 960,000
Accounts Receivable ....................................... 960,000
Construction in Process (Gross Profit)
($2,000,000 X .34)........................................ 680,000
Construction Expenses ........................................... 1,700,000
Revenue from Long-Term Contracts
($7,000,000 X .34*) ......................................... 2,380,000
*[$1,700,000 ÷ ($1,700,000 + $3,300,000)]

Current Assets
Accounts receivable ......................................... $240,000
Inventories
Construction in process........................... $1,715,000
Less: Billings............................................ 1,000,000
Costs in excess of billings .......................... 715,000
(a) Construction Expenses ($265,364 - $285,364) ..... 285,364
Construction in Process ........................... 20,000*
Revenue from Long-Term Contracts ....... 265,364**
(b) Loss from Long-Term Contracts ..................... 20,000*
Construction in Process ........................... 20,000
*[$420,000 – ($278,000 + $162,000)]
**$420,000 X [$278,000/($278,000 + $162,000)]

April 1, 2020
Cash .......................................................................... 25,000

Notes Receivable ($75,000 – $25,000) .................... 50,000
Discount on Notes Receivable ........................ 8,598
Unearned Service Revenue (Training) ........... 2,000
Unearned Franchise Revenue
($25,000 + $41,402 - $2,000) .......................... 64,402
July 1, 2020
Unearned Service Revenue (Training) ................... 2,000

Unearned Franchise Revenue ................................ 64,402
Franchise Revenue .......................................... 64,402
Service Revenue (Training) ............................. 2,000
SOLUTIONS TO EXERCISES
EXERCISE 18.1 (10–15 minutes)
(1) Kawaski is in the business of buying and selling both new and used
jeeps and this activity should be considered part of its ordinary
activities. Customers have entered into a contract to purchase these
jeeps and sales revenue should be recognized by Kawaski.
Conversely, if Kawaski is selling its corporate headquarters to another
party, the transaction would not be a contract with a customer because
selling real estate is not an ordinary activity of Kawaski. In this case a
gain or loss on sale should be recognized on the transaction.
(2) This statement is not correct. This criterion was used in previous GAAP
but often proved difficult to implement in practice. In the new standard,
indicators that control has passed to the customer include having (1) a
present obligation to pay, (2) physical possession, (3) legal title, (4)
risks and rewards of ownership, and (5) acceptance of the asset.
(3) This statement is not correct. This criterion was used in previous
GAAP but proved difficult to implement in practice. See additional
answer related to item number 2.
(4) This statement is not correct. For a valid contract to exist, the
collection of revenue must be probable.
(5) The distinction between revenue and gains is important because it is
useful to understand how these increases in net income occurred.
Sales revenue results from the normal operating activities of the
business, and therefore, is generally considered a better measure for
predicting the amount, timing, and uncertainty of future cash flows.
Gains, on the other hand, are often incidental to the business, and
therefore, do not provide as much predictive information.
LO: 1, Bloom: C, Difficulty: Simple, Time: 10-15, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
(1) A wholly unperformed contract is not recorded until one or both of the
parties have performed. The new revenue standard uses an asset-
liability approach for recognizing revenue. In this model, until one of
the parties performs, a net asset or net liability does not exist, and
therefore, there is no effect on the company’s financial position.
(2) This statement is true. One of the difficulties in the revenue
recognition process is identifying the performance obligations in the
contract.
EXERCISE 18.2 (continued)
(3) Elaina should account for this additional option. Whether the option
provides for free goods or goods at a discount, the option is a
separate performance obligation which affects the current transaction
price. Consideration payable to a customer is a reduction of the
transaction price unless the payment is for a distinct good or service.
(4) Under the GAAP, the collectability criterion is designed to prevent
companies from applying the revenue model to problematic contracts
and recognizing revenue and a large impairment loss at the same time.
However, if the company determines that it is probable that it will
collect the funds, then the normal risks of nonpayment are not
considered at the time the revenue is reported.
LO: 1, Bloom: C, Difficulty: Moderate, Time: 10-15, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
(a) May 1, 2020
No entry – neither party has performed on May 1, 2020.
(b) May 15, 2020
Cash ............................................................................ 900

Unearned Sales Revenue .................................. 900
(c) May 31, 2020
Unearned Sales Revenue .......................................... 900

Sales Revenue .................................................... 900
Cost of Goods Sold .................................................... 575

Inventory ............................................................. 575
LO: 1, 2, Bloom: AP, Difficulty: Moderate, Time: 10-15, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
(a) The journal entry to record the sale and related cost of goods sold are
as follows:
January 2, 2020
Notes Receivable ............................................ 600,000

Sales Revenue ($610,000 − $10,000) ... 600,000
Cost of Goods Sold ............................................ 500,000
Inventory................................................ 500,000
The journal entry to record the collection of the note is as follows:
January 28, 2020
Cash ................................................................ 610,000

Notes Receivable .................................. 600,000
Sales Discounted Forfeited ................. 10,000
(b) January 2, 2020
Notes Receivable ............................................ 610,000

Sales Revenue ...................................... 610,000
Cost of Goods Sold ............................................ 500,000
Inventory................................................ 500,000
January 28, 2020

Cash ................................................................ 610,000
Note that the time value of money is not considered because the
contract is less than a year. Also, if payment occurs within 5 days,
under the net method, the entry would be:
Cash ................................................................ 600,000

If payment occurs within 5 days, under the gross method, the entry
would be as follows:
Cash ................................................................. 600,000

Sales Discounts .............................................. 10,000
EXERCISE 18.5 (20-25 Minutes)
(a) The transaction price for this contract should be computed as follows:
Contract price $200,000

Expected value of the bonus 34,000
Transaction Price $234,000
Completion Time Probability of X Bonus Amounts = Expected Value

Completion
($10,000
decrease/week)
On time 55% $40,000 $22,000

Within one week 30% 30,000 9,000
Within two weeks 15% 20,000 3,000
Total expected value
of bonus $34,000
(b) The transaction price for this contract should be computed as follow:
Contract price $200,000

Expected value of the bonus 39,000
Transaction price $239,000
Completion Time Probability of Completion X Bonus Amounts = Expected Value

($10,000 decrease/week)
On time 90% $40,000 $36,000

Within one week 10% 30,000 3,000
Computation of
expected value $39,000
NOTE TO INSTRUCTOR: Given just two outcomes, the company could
determine the bonus component of the transaction price based on the most
likely outcome ($40,000). If reliable, use of probability outcomes is more
accurate.
EXERCISE 18.6 (20-25 minutes)
The transaction price that Real Estate Inc. should record is $3,000,000. At
this point, it appears that it will be difficult for Real Estate Inc. to argue that
it is probable that a significant reversal will not occur related to the 1% of
royalty payments. Real Estate Inc., for example, has asked for a different
method of compensation (sale price of $3,250,000) which is not that much
greater than the $3,000,000. However, the $3,250,000 sales price was
rejected by the Blackhawk Group. The preferable approach is for Real
Estate to record the transaction price at $3,000,000 and record revenue
related to the royalty arrangement as it occurs.
(a) Because the arrangement only has two possible outcomes (regulatory
approval is achieved or not), Blair determines the transaction price
based on the most likely approach. Thus, the best measure for the
transaction price is $10,000,000.
(b) December 20, 2020
Accounts Receivable ...................................... 10,000,000

License Revenue ..................................... 10,000,000
January 15, 2021
Cash ................................................................. 10,000,000

Accounts Receivable .............................. 10,000,000
(a) Aaron determines that the transaction price for the 100 policies is
$14,500 [($100 X 100) + ($10 X 4.5 X 100)].
(b) Aaron will recognize revenue of $2,636 ($14,500 X 12/66) because on

average, customers renew for 4.5 years, Aaron includes that amount in
its estimate for the transaction price. As circumstances change, Aaron
updates its estimate of the transaction price and recognizes revenue
(or a reduction of revenue) for those changes in circumstances.
(a) December 31, 2020
Cash .................................................................. 240,000

Unearned Rent Revenue
(2021 slips – 300 X $800)......................... 240,000
December 31, 2021
Unearned Rent Revenue ................................. 240,000

Rent Revenue ........................................... 240,000
Cash .................................................................. 152,000

[2022 slips – 200 X $800 X (1.00 – .05)] .. 152,000
Cash .................................................................. 38,400

[2023 slips – 60 X $800 X (1.00 – .20)] .... 38,400
(b) The marina operator should recognize that the 2021 advance rentals
generated $190,400 ($152,000 + $38,400) of cash in exchange for the
marina’s promise to deliver future services. In effect, this has
accelerated payments from boat owners. Also, the price of rental
services has effectively been reduced. The current cash bonanza does
not reflect current revenue. The future costs of operation must be
covered, in part, from this accelerated cash inflow. On a present value
basis, the granting of these discounts seems ill-advised unless
interest rates were to skyrocket so that interest revenue would offset
the discounts provided or because costs for dock repairs is expected
to increase significantly.
July 1, 2020
No entry – neither party has performed under the contract.
On September 1, 2020, Geraths has two performance obligations: (1) the

delivery of the windows and (2) the installation of the windows.
Windows $2,000
Installation 600
Total $2,600
Allocation
Windows ($2,000 ÷ $2,600) X $2,400 = $1,846*
Installation ($600 ÷ $2,600) X $2,400 = 554**
Revenue recognized $2,400
(rounded to nearest dollar)
Geraths makes the following entries for delivery and installation:
September 1, 2020
Cash ........................................................................... 2,000

Accounts Receivable ................................................ 400
Unearned Service Revenue ............................. 554**
Sales Revenue .................................................. 1,846*

Inventory ............................................................ 1,100
(Windows delivered, performance obligation for installation recorded)
October 15, 2020
Cash ........................................................................... 400

Unearned Service Revenue ..................................... 554
Service Revenue (Installation) ......................... 554
Accounts Receivable ........................................ 400
The sale of the windows is recognized once delivered. The installation fee
is recognized when the windows are installed.
LO: 2, 3, Bloom: AP, Difficulty: Complex, Time: 25-30, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
(a) July 1, 2020
No entry – neither party has performed under the contract.
On September 1, 2020, Geraths has two performance obligations: (1) the

delivery of the windows and (2) the installation of the windows.
Windows $2,000
Installation ($400 + (.20 X $400)] 480
Total $2,480
Allocation
Windows ($2,000 ÷ $2,480) X $2,400 = $1,935*
Installation ($480 ÷ $2,480) X $2,400 = 465**
Revenue recognized $2,400
(rounded to nearest dollar)
September 1, 2020
Cash ........................................................................... 2,000

Accounts Receivable ............................................... 400
Unearned Service Revenue ............................ 465**
Sales Revenue ................................................. 1,935*

Inventory ........................................................... 1,100
October 15, 2020
Cash ........................................................................... 400

Unearned Service Revenue ..................................... 465
Service Revenue (Installation) ........................ 465
Accounts Receivable ....................................... 400
The sale of the windows is recognized once delivered. The installation is

fee is recognized when the windows are installed.
(b) If Geraths cannot estimate the costs for installation, then the residual
approach is used. In this approach, the total fair value of the contract
is $2,400. Given that the windows have a standalone fair value of
$2,000, then $400 ($2,400 – $2,000) is allocated to the installation.
September 1, 2020
Cash ................................................................... 2,000

Accounts Receivable ........................................ 400
Unearned Service Revenue ..................... 400*
Sales Revenue .......................................... 2,000**
Cost of Goods Sold ........................................... 1,100

Inventory .................................................... 1,100
(Windows delivered, performance obligation for installation recorded)
October 15, 2020
Cash ................................................................... 400

Unearned Service Revenue .............................. 400
Service Revenue (Installation) ................. 400
Accounts Receivable ................................ 400
(a) The entry to record the sale and related cost of goods sold is as
follows:
January 2, 2020
Accounts Receivable ..................................... 410,000

Sales Revenue......................................... 370,000*
Unearned Service Revenue.................... 40,000
Cost of Goods Sold ........................................ 300,000**

Inventory .................................................. 300,000
(b) First Quarter
Sales revenue $370,000*

Cost of goods sold 300,000**
Gross profit $70,000
The revenue for installation will be recognized in the second quarter.

LO: 2, 3, Bloom: AP, Difficulty: Simple, Time: 10-15, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
(a) The total revenue of $1,000,000 should be allocated to the two

performance obligations based on their standalone selling prices. In
this case, the standalone selling price of the equipment should be
considered $1,000,000 and the standalone selling price of the
installation fee is $50,000. The total standalone selling price to
consider is $1,050,000 ($1,000,000 + $50,000). The allocation is as
follows.
Equipment ($1,000,000 / $1,050,000) X $1,000,000 = $952,381

Installation ($50,000 / $1,050,000) X $1,000,000 = $ 47,619
(b) Crankshaft makes the following entries:
June 1, 2020
Accounts Receivable ...................................... 1,000,000

Unearned Service
Revenue (Installation) .......................... 47,619
Sales Revenue (Equipment) ................... 952,381
Cost of Goods Sold ......................................... 600,000

Inventory .................................................. 600,000
September 30, 2020
Unearned Service Revenue ............................ 47,619

Service Revenue (Installation) ............... 47,619
Cash ................................................................. 1,000,000

The sale of the equipment should be recognized upon delivery, as the

customer controls the asset and therefore Crankshaft's performance
obligation is met. Service revenue for the installation is recognized on
September 30, 2020 - the services have been provided and the
performance obligation is satisfied.
(a) The total revenue of $1,000,000 should be allocated to the two

performance obligations based on their standalone selling prices. In
this case, the standalone selling price of the equipment should be
considered $1,000,000 and the standalone selling price of the
installation fee, assuming a cost-plus approach is $45,000 [($36,000 +
(.25 X $36,000)]. The total standalone selling price to consider is
$1,045,000c ($1,000,000 + $45,000). The allocation is as follows:
Equipment ($1,000,000 / $1,045,000) X $1,000,000 = $ 956,938*

Installation ($45,000 / $1,045,000) X $1,000,000 = $ 43,062**
(b) Crankshaft makes the following entries:
June 1, 2020
Accounts Receivable ..................................... 1,000,000

Unearned Service
Revenue (Installation).......................... 43,062**
Sales Revenue (Equipment)................... 956,938*
Cost of Goods Sold ........................................ 600,000

Inventory .................................................. 600,000
September 30, 2020
Unearned Service Revenue ........................... 43,062

Service Revenue ..................................... 43,062
Cash ................................................................. 1,000,000

(a) The separate performance obligations are the oven, installation, and
maintenance service, since each item has standalone selling price to
the customer.
(b) Oven $ 800/$1,025 X $1,000 = $ 780

Installation $ 50*/$1,025 X $1,000 = $ 49
Maintenance $ 175**/$1,025 X $1,000 = $ 171
Total $1,025
*$50 = $850 – $800

**$175 = $975 – $800
LO: 2, 3, Bloom: AP, Difficulty: Simple, Time: 10-15, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
(a) 1. The journal entries to record sales and related cost of goods sold
are as follows:
March 10, 2020
Accounts Receivable (200 X $50) .................. 10,000

Sales Revenue ..................................... 10,000
Cost of Goods Sold (200 X $30) .................. 6,000

Inventory .............................................. 6,000
2. The journal entries to record sales returns are as follows:
March 25, 2020
Sales Returns and Allowances (6 X $50) ...... 300

Accounts Receivable ............................ 300
Returned Inventory (6 x $30) ......................... 180

Cost of Goods Sold ............................... 180
3. The adjusting journal entries required to record estimated

remaining returns are as follows:
March 31, 2020
Sales Returns and Allowances [(10 – 6) X $50] ... 200c

Allowance for Sales Returns and Allowances 200
Estimated Inventory Returns [(10 – 6) X $30] 120

Cost of Goods Sold ........................... 120f
(b) Financial Statement Presentation
Income Statement (partial)

For the quarter ended March 31, 2020
Sales revenue (200 × $50) $10,000a

Less: Sales returns and allowances ($300 + $200) 500
Net sales 9,500
Cost of goods sold ($6,000 − $180 − $120) 5,700
Gross profit $ 3,800
Balance Sheet (partial)

At March 31, 2020
Accounts receivable ($10,000 – $300) $9,700

Less: Allowance for sales returns and allowances 200
Accounts receivable (net) $9,500
Returned inventory (including estimated) (10 × $30) $ 300

revenue net. If sales are recorded net, the entries are as follows:
(a)
March 10, 2020
Accounts Receivable (200 X $50) ............. 10,000

Allowances (10 X $50) ............ 500
Sales Revenue ................................ 9,500
Cost of Goods Sold ...................................... 6,000

Inventory .............................................. 6,000
Estimated Inventory Returns (10 X $30) ..... 300

Cost of Goods Sold ............................. 300
The journal entries to record the return are as follows:
March 25, 2020

Allowances (6 X $50) ...................... 300
Accounts Receivable ............................ 300
Returned Inventory (6 X $30) ........................ 180

Estimated Inventory Returns ................ 180
March 31, 2020
No entries required.

Net sales revenue $ 9,500

Cost of goods sold ($6,000 – $300) 5,700

At March 31, 2020


are as follows:
March 10, 2020
Cash (200 X $50)............................................. 10,000

Sales Revenue ..................................... 10,000
Cost of Goods Sold (200 X $30)................... 6,000

Inventory............................................... 6,000
2. The journal entries to record sales returns are as follows:
March 25, 2020
Sales Returns and Allowances (6 X $50) ...... 300

Accounts Payable .................................. 300
Returned Inventory (6 X $30).......................... 180

Cost of Goods Sold ................................ 180
3. The adjusting journal entries required to record estimated

remaining returns are as follows:
March 31, 2020
Sales Returns and Allowances [(10 – 6) X $50] 200

Accounts Payable ................................ 200
Estimated Inventory Returns [(10 – 6) X $30] . 120

Cost of Goods Sold ........................... 120

Sales revenue (200 × $50) $10,000

Net sales 9,500
Cost of goods sold ($6,000 – $180 – $120) 5,700

At March 31, 2020
Cash (assuming no cash payments to Barr) $10,000

($180 + $120)
Accounts payable ($300 + $200) $ 500

(a)
March 10, 2020
Cash (200 X $50) ............................................ 10,000

Refund Liability (10 X $50) ................. 500
Sales Revenue ..................................... 9,500
Cost of Goods Sold (200 X $30) .................. 6,000

Inventory .............................................. 6,000
Estimated Inventory Returns (10 X $30) ..... 300

Cost of Goods Sold ........................... 300
The journal entries to record the return is as follows:
March 25, 2020
Refund Liability (6 X $50)........................... 300

Accounts Payable ............................. 300
Returned Inventory (6 X $30)..................... 180

Estimated Inventory Returns ........... 180
March 31, 2020
No entries required.

Net sales revenue ([200 × $50] – [10 X $50]) 9,500

Cost of goods sold ($6,000 – $300) 5,700

At March 31, 2020
Cash (assuming no cash payments to Barr) $10,000

Accounts payable $ 300

Refund Liability ($500 - $300) $ 200
EXERCISE 18.18 (20-25 minutes)
are as follows:
October 2, 2020
Accounts Receivable ................................. 6,000

Sales Revenue ................................ 6,000
Cost of Goods Sold ................................. 3,600

Inventory ......................................... 3,600
2. The journal entry to record the allowance is as follows:
October 16, 2020
Sales Returns and Allowances ................. 400

Accounts Receivable ....................... 400
3. The adjusting journal entry to record estimated remaining

allowances is as follows:
October 31, 2020
Sales Returns and Allowances .................. 250

Allowance for Sales Returns
and Allowances ........................... 250

For the quarter ended October 31, 2020
Sales revenue $6,000

Net sales 5,350
Cost of goods sold 3,600
Gross profit $1,750

At October 31, 2020
Accounts receivable ($6,000e – $400f) $5,600


(a)
1. October 2, 2020
Accounts Receivable (200 X $30) ............. 6,000

and Allowances............................ 800
Sales Revenue ................................ 5,200
Cost of Goods Sold ................................ 3,600

Inventory......................................... 3,600
2. The journal entries to record the allowance is as follows:
October 16, 2020

and Allowances ....................................... 400
Accounts Receivable ........................ 400
3. The adjusting journal entry to record estimated remaining

allowances is as follows:
October 31, 2020
Allowance for Sales Returns and Allowances

($800 – $400 – $250) ................. 150
Sales Revenue ................................ 150

For the quarter ended October 31, 2020
Net sales revenue ($5,200 + $150) $5,350

Cost of goods sold 3,600
Gross profit $1,750

at October 31, 2020

(a) The journal entries to record sales and related cost of goods sold are
as follows:
June 3, 2020
Accounts Receivable (Mount) .................. 8,000

Sales Revenue ................................ 8,000

Inventory ......................................... 6,000
The journal entries to record the return is as follows:
June 8, 2020
Sales Returns and Allowances ................. 300

Accounts Receivable (Mount) ......... 300
Returned Inventory
[*300 × ($6,000/$8,000)]........................... 225
Cost of Goods Sold .......................... 225
*Because these goods were flawed they likely will be separated

from other inventory.
The journal entry to record delivery cost is as follows:
June 8, 2020
Delivery Expense........................................ 24
Cash .................................................... 24
July 16, 2020
Cash ($8,000 − $300).................................. 7,700

Accounts Receivable (Mount) .......... 7,700

June 3, 2020
Accounts Receivable (Mount)................... 8,000

and Allowances ..................... 800
Sales Revenue ................................ 7,200

Inventory......................................... 6,000
Estimated Inventory Returns ................. 600*

Cost of Goods Sold ....................... 600
*[($6,000/ $8,000) X $800]
The journal entries to record the return are as follows:
June 5, 2020
Allowance for Sales Returns and Allowances 300

Accounts Receivable (Mount) .......... 300
Returned Inventory [($6,000/ $8,000) X $300] 225

Estimated Inventory Returns ........... 225
Note: Because these goods were flawed, they likely will be

separated from other inventory.
The journal entry to record delivery cost is as follows:
June 8, 2020
Delivery Expense ....................................... 24
Cash.................................................... 24
July 16, 2020
Cash............................................................ 7,700
Accounts Receivable (Mount).......... 7,700
(a) Sales reported gross at point of sale.
January 2, 2020
Accounts Receivable ................................ 1,500,000

Sales Revenue ................................ 1,500,000

Inventory ......................................... 750,000
(b) March 1, 2020
Sales Returns and Allowances ................. 100,000

Accounts Receivable ....................... 100,000
Returned Inventory .................................... 50,000

Cost of Goods Sold ................. 50,000
[($750,000 / $1,500,000) X $100,000]
March 15, 2020
Cash ($1,500,000 − $100,000) .................... 1,400,000

Accounts Receivable ........................ 1,400,000
(c) March 31, 2020
Sales Returns and Allowances ................. 200,000

Allowances for Sales Returns
and Allowances ............................. 200,000
Estimated Inventory Returns .................... 100,000

Cost of Goods Sold ........................... 100,000
[($750,000 / $1,500,000) X $200,000]

(a) January 2, 2020

Allowances ($1,500,000 X .20) ............ 300,000
Sales Revenue......................................... 1,200,000

Inventory .................................................. 750,000
Estimated Inventory Returns ......................... 150,000*

*[($750,000 /$1,500,000) X $300,000]
(b) March 1, 2020

Allowances ........................................... 100,000
Accounts Receivable .............................. 100,000
Returned Inventory (.50 X $100,000) ............. 50,000

Estimated Inventory Returns ................. 50,000
($750,000 / $1,500,000)
March 15, 2020
Cash ($1,500,000 - $100,000) .......................... 1,400,000

(c) March 31, 2020
Sales Returns and Allowances……………… 200,000

Accounts Payable ............................. 200,000*
Estimated Inventory Returns ......................... 100,000

*[($750,000 / $1,500,000) X $200,000]
The credit is to Accounts Payable because the customer has paid the
account in full. As a result, any subsequent allowances will be settled
in cash.
(a) Uddin could recognize revenue at the point of sale based upon the time
of shipment because the books are sold f.o.b. shipping point. That is,
control has transferred, and its performance obligation is met. Because
the returns can be estimated, recognition is at point of sale (shipping
point).
(b) Based on the available information, the correct treatment is to

recognize revenue when the performance obligation is satisfied – in
this case at the time of shipment (transfer of title). In addition to legal
title, other indicators of control appear to be met (1) Uddin has the
right to payment (2) Uddin has transferred the physical possession of
the asset (3) the bookstore has significant risks and rewards of
ownership, (4) the bookstore has accepted the textbooks, and (5)
collection is probable.
(c) The entries to record the sale of the textbooks and related cost of
goods sold are as follows:
July 1, 2020
Accounts Receivable ................................ 15,000,000

Sales Revenue ................................ 15,000,000
Cost of Goods Sold ................................ 12,000,000
Inventory......................................... 12,000,000
(d) The entries to record the returns, related cost of goods sold, and cash
payment are as follows:
October 3, 2020
Sales Returns and Allowances ................. 1,500,000

Accounts Receivable...................... 1,500,000
Returned Inventory ($1,500,000 X .80*) . 1,200,000
Cost of Goods Sold ....................... 1,200,000
Cash ......................................................... 13,500,000
Accounts Receivable..................... 13,500,000
*($12,000,000 / $15,000,000)
(e) On October 31, 2020, Uddin prepares financial statements
On Uddin’s income statement, the following information is reported:
Sales revenue $15,000,000

Less: Sales returns and allowances 1,500,000
Net sales 13,500,000
Cost of goods sold ($12,000,000 - $1,200,000) 10,800,000
Net Income $ 2,700.000
On Uddin’s balance sheet as of October 31, 2020 the following information

is reported.
Accounts receivable ($15,000,000 - $1,500,000 - $13,500,000) = $0

Returned inventory $1,200,000
As a result, at the end of the reporting period the net sales reflect the
amount that Uddin is reasonably expected to collect.

(c)
July 1, 2020

Allowances ($15,000,000 X .12) .......... 1,800,000
Sales Revenue (Texts) ............................ 13,200,000
Cost of Goods Sold ........................................ 12,000,000

Inventory .................................................. 12,000,000
Estimated Inventory Returns ........................ 1,440,000*

Cost of Goods Sold ................................ 1,440,000
*(.12 X $12,000,000)
(d)
Inventory Returned on October 3, 2020

Allowances ........................................... 1,500,000
Inventory (Returns) ......................................... 1,200,000

Estimated Inventory Returns* ................ 1,200,000
Cash ................................................................ 13,500,000

*[($12,000,000 / $15,000,000) X $1,500,000]
(e) On October 31, 2020, Uddin prepares financial statements. As no other

returns are expected the following entry is made to close out the
allowance:

Allowances ........................................... 300,000
Sales Revenue (Texts) ............................ 300,000j
As a result, at the end of the reporting period (the return period for these
sales has expired), the net sales reflect the amount that Uddin is
reasonably expected to collect.
On Uddin’s income statement, the following information is reported:

Net sales ($13,200,000 + $300,000) 13,500,000
Cost of goods sold ($12,000,000 − $1,200,000) 10,800,000
Net Income $ 2,700.000
On Uddin’s balance sheet as of October 31, 2020 the following information

is reported:
Accounts receivable $0
Returned inventory $1,200,000
(a) In this case, due to the agreement to repurchase the equipment,

Cramer continues to have control of the asset and therefore this
agreement is a financing transaction and not a sale. That is, if the
company has an unconditional obligation (forward) or unconditional
right (call option) for an amount greater than or equal to its selling
price, the transaction is a financing transaction by the company. Thus
the asset is not removed from the books of Cramer. The entries to
record to financing are as follows:
July 1, 2020
Cash ................................................................. 40,000
Liability to Enyart Company .................. 40,000
(b) December 31, 2020
Interest Expense ............................................. 1,200

Liability to Enyart Company
($40,000 X .06 X 6/12) ........................... 1,200
*An interest rate of 6% is imputed from the agreement ($2,400 ÷ $42,400).
(c) June 30, 2021

Interest Expense ............................................. 1,200
Liability to Enyart Company
($40,000 X .06 X 6/12) ........................... 1,200
Liability to Enyart Company .......................... 42,400

($40,000 + $1,200 + $1,200)
Cash ........................................................ 42,400
Because Zagat has an unconditional obligation (forward) to repurchase the
ingots at an amount greater than the selling price, the transaction is treated
as a financing.
(a) March 1, 2020
The selling price of the ingots is $200,000. Zagat would record the
following entry when it receives the consideration from the customer:
Cash ................................................................. 200,000

Liability to Werner Metal Company ....... 200,000
(b) May 1, 2020
Interest Expense ($200,000 X .02).................. 4,000
Liability to Werner Metal Company ............... 200,000
Cash .......................................................... 204,000
LO: 3, Bloom: AP, Difficulty: Moderate, Time: 10-15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving
(a) This transaction is a bill-and-hold situation. Delivery of the counters is

delayed at the buyer’s request, but the buyer takes title and accepts
billing. Thus, the agreement must be evaluated to determine if revenue
can be recognized before delivery.
(b) Revenue is reported at the time title passes if the following conditions
are met:
(1) The reason for the bill-and-hold arrangement must be substantive.

(2) The product must be identified separately as belonging to the
customer.
(3) The product currently must be ready for physical transfer to the
customer, and
(4) The seller cannot have the ability to use the product or to direct it
to another customer.
(c) Cash ................................................................. 300,000

Sales Revenue......................................... 2,000,000
LO: 3, Bloom: K, AP, Difficulty: Moderate, Time: 10-15, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
(a) Inventoriable costs:

80 units shipped at cost of $500 each ............ $40,000
Freight ................................................................ 840
Total inventoriable cost ............................ $40,840
Cost of 40 units sold (40/80 X $40,840) ........... $20,420
(b) Computation of consignment profit:

Consignment sales (40 X $750) ....................... $30,000
Cost of units sold (40/80 X $40,840) ................ (20,420)
Commission charged by consignee
(.06 X $30,000) ............................................... (1,800)
Advertising cost ................................................ (200)
Installation costs............................................... (320)
Profit on consignment sales ................................... $ 7,260
(c) Remittance of consignee:

Consignment sales ................................................... $30,000
Less: Commissions ................................................. $1,800
Advertising .................................................... 200
Installation ..................................................... 320 2,320
Remittance from consignee .................................... $27,680
Note: Since the installation costs related only to goods sold, the
installation costs are not part of the inventory cost, but are a selling
expense.
(a) January 2, 2020
Cash ............................................................................ 50,000

Sales Revenue .................................................... 50,000
During 2020
Warranty Expense ...................................................... 900
Cash, Labor, Parts .............................................. 900
December 31, 2020

Warranty Liability ............................................... 650
(b) January 2, 2020
Cash ($50,000 + $800) ................................................ 50,800

Sales Revenue .................................................... 50,000
Unearned Warranty Revenue (Service-type) ... 800
During 2020
Cash, Labor, Parts .............................................. 900
December 31, 2020

Warranty Liability ............................................... 650
Grando recognizes $400 ($800 X 1/2) of revenue on the service type warranty
in 2022 and 2023. Warranty costs in the extended warranty period will be
expensed as incurred.
LO: 3, Bloom: AP, Difficulty: Moderate, Time: 10-15, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving
(a) October 1, 2020
To record sales revenue, warranties, and related cost of goods sold
Cash (or Accounts Receivable) ................................. 3,600

Sales Revenue..................................................... 3,200
Unearned Warranty Revenue (Service-type) .... 400
Cost of Goods Sold .................................................... 1,440
Inventory .............................................................. 1,440
To record warranty expense on October 25, 2020

Cash, Parts, Labor .............................................. 200
(b) Celic recognizes warranty expenses associated with the assurance-

type warranty as actual warranty costs are incurred during the first 90
days after the customer receives the computer. Celic recognizes the
Unearned Service Revenue associated with the service-type warranty
as revenue during the extended warranty period and recognizes the
costs associated with providing the service-type warranty as they are
incurred.
(a) No entry – neither party has performed on the contract on January 1,

2020.
(b) The entries to record the sale and related cost of goods sold of the
wiring base is as follows:
February 5, 2020
Contract Asset ............................................................ 1,200

Sales Revenue..................................................... 1,200

Inventory .............................................................. 700
(c) The entries to record the sale and related cost of goods sold of the
shelving unit is as follows:
February 25, 2020
Cash ............................................................................ 3,000

Contract Asset .................................................... 1,200
Sales Revenue .................................................... 1,800

Inventory ............................................................. 320
(a) Cash ................................................................. 9,000

Sales Revenue (90 X $100) ..................... 9,000

Inventory (90 X $54) ................................ 4,860
(b) Cash ................................................................. 1,000

Sales Revenue (10 X $100) ..................... 1,000
Cost of Goods Sold ......................................... 540

Inventory (10 X $54) ................................ 540
In this situation, the contract modification for the additional 45

products is, in effect, a new and separate contract for future products
that does not affect the accounting for the previously existing contract.
(c) In this case, because the new price does not reflect a stand-alone
selling price, Gaertner allocates a modified transaction price (less the
amounts allocated to products transferred at or before the date of the
modification) to all remaining products to be transferred.
Under the prospective approach, Gaertner determines the transaction

price for subsequent sales ($97.86) as follows:
Consideration for products not yet delivered

under original contract ($100 X 60) $ 6,000
Consideration for products to be delivered
under the contract modification ($95 X 45) 4,275
Total remaining revenue $10,275
Revenue per remaining unit ($10,275 ÷ 105) = $97.86.
As indicated, the numerator includes products not yet transferred

under original contract ($100 X 60) plus products to be transferred
under the contract modification ($95 X 45), which is divided by the
remaining 105 products.
The journal entries to record subsequent sales and related cost of

goods sold for 10 units is as follows:
Cash (10 X $97.86) .......................................... 978.60

Sales Revenue......................................... 978.60
Cost of Goods Sold ........................................ 540.00

Inventory .................................................. 540.00
(a) January 1, 2020
Cash ................................................................. 10,000

Unearned Service Revenue.................... 10,000
December 31, 2020

Service Revenue ..................................... 10,000
January 1, 2021
Cash ................................................................. 10,000

Unearned Service Revenue .................... 10,000
December 31, 2021
Unearned Service Revenue ............................ 10,000

Service Revenue ...................................... 10,000
(b) January 1, 2022
Cash ($8,000 + $20,000) .................................. 28,000

December 31, 2022
Unearned Service Revenue ($28,000 ÷ 4) ..... 7,000

Service Revenue ...................................... 7,000
In this case, the modification of the contract does not result in new
performance obligation. As a result, the remaining service revenue is
recognized evenly over the remaining four years.
(c) Given the change in services in the extended contract period, the
services are distinct; the modification should not be considered as
part of the original contract. Tyler recognizes revenue on the
remaining services at different rates. Tyler will recognize $6,667
($20,000 ÷ 3) per year in the extended period (2023–2025). For 2022,
Tyler makes the following entry:
January 1, 2022
Cash ($8,000 + $20,000) .................................. 28,000

December 31, 2022

Service Revenue ..................................... 8,000
(a) The $2,000 commission costs related to obtaining the contract are
recognized as an asset. The design services ($3,000), controllers
($6,000), testing and inspection fees ($2,000) should be capitalized as
well, as they are specific to the contract.
The $27,000 cost for the receptacles and loading equipment appear to
be independent of the contract, as Rex will retain these and likely use
them in other projects.
(b) Companies only capitalize costs that are direct, incremental, and
recoverable (assuming that the contract period is more than one year.
General and administrative costs (unless those costs are explicitly
chargeable to the customer under the contract) and wasted materials
and labor are not eligible for capitalization and should be expensed as
incurred.
(a) If the contract is for less than 1 year, Rex can use the practical
expedient and recognize the incremental costs of obtaining a contract
as an expense when incurred.
(b) The collectibility of the contract payments will not affect the amount of
revenue recognized. That is, the amount recognized is not adjusted for
customer credit risk. Rather, Rex should report the revenue gross and
then present an allowance for any impairment due to bad debts
(recognized initially and subsequently in accordance with the
respective bad debt guidance) prominently as an expense in the
income statement. If there is significant doubt at contract inception
about collectibility, this may indicate that the parties to the contract
are not committed to perform their respective obligations to the
contract (i.e., existence of a contract may not be met). No revenue is
recognized until the issue of significant doubt is resolved.
LO: 4, Bloom: AN, Difficulty: Moderate, Time: 20-25, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
*EXERCISE 18.33 (20–25 minutes)
(a) Gross profit recognized in:
2020 2021 2022

Contract price $1,600,000 $1,600,000 $1,600,000
Costs:
Costs to date $400,000 $825,000 $1,070,000
Estimated costs to
complete 600,000 1,000,000 275,000 1,100,000 0 1,070,000
Total estimated profit 600,000 500,000 530,000
Percentage completed
to date X .40* X .75** X 1.00
Total gross profit
recognized 240,000 375,000 530,000
Less: Gross profit
recognized in previous
years 0 240,000 375,000
Gross profit
recognized in current
year $ 240,000 $ 135,000 $ 155,000
* *$400,000 ÷ $1,000,000 = 40% **$825,000 ÷ $1,100,000 = 75%
*EXERCISE 18.33 (continued)
(b)
2021
Construction in Process ($825,000 – $400,000) .... 425,000
Materials, Cash, Payables ............................... 425,000
Accounts Receivable ($900,000 – $300,000) ......... 600,000

Billings on Construction in Process .............. 600,000
Cash ($810,000 – $270,000) .................................... 540,000

Accounts Receivable ....................................... 540,000
Construction Expenses ($825,000 – $400,000) ..... 425,000

Construction in Process ......................................... 135,000
Revenue from Long-Term Contracts ............. 560,000*
*$1,600,000 X (.75 – .40)
(c) Gross profit recognized in:

Gross profit 2020 2021 2022
$–0– $–0– $530,000*
*($1,600,000 – $1,070,000)
(a) Contract billings to date ......................................... $61,500

Less: Accounts receivable 12/31/20 ..................... 18,000
Portion of contract billings collected .................... $43,500
$19,500
(b) = 30%
$65,000
(The ratio of gross profit to revenue recognized in 2020.)
$1,000,000 X .30 = $300,000
(The initial estimated total gross profit before tax on the contract.)
LO: 5, Bloom: AP, Difficulty: Simple, Time: 10-15, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
DOUGHERTY INC.
Computation of Gross Profit to be
Recognized on Uncompleted Contract
Year Ended December 31, 2020
Total contract price

Estimated contract cost at completion
($800,000 + $1,200,000) ................................................. $2,000,000
Fixed fee.............................................................................. 450,000
Total ............................................................................. 2,450,000
Total estimated cost .......................................................... (2,000,000)
Gross profit ................................................................................ 450,000
Percentage of completion ($800,000 ÷ $2,000,000) ......... X .40
Gross profit to be recognized .................................................. $ 180,000
$640,000
(a) 2020: X $2,200,000 = $880,000
$1,600,000
2021: $2,200,000 (contract price) minus $880,000 (revenue recognized

in 2020) = $1,320,000 (revenue recognized in 2018).
(b) All $2,200,000 of the contract price is recognized as revenue in 2021.
(c) Using the percentage-of-completion method, the following entries

would be made:
Construction in Process ......................................... 640,000

Materials, Cash, Payables .............................. 640,000
Accounts Receivable .............................................. 420,000

Billings on Construction in Process ............. 420,000
Cash ......................................................................... 350,000

Accounts Receivable ...................................... 350,000
Construction in Process ......................................... 240,000*

Construction Expenses .......................................... 640,000
Revenue from Long-Term Contracts
[from (a)] ....................................................... 880,000
*[$2,200,000 – ($640,000 + $960,000)] X [($640,000 / $1,600,000)]
(Using the completed-contract method, all the same entries are made
except for the last entry. No income is recognized until the contract is
completed.)
(a) Computation of Gross Profit to Be Recognized under Completed-

Contract Method.
No computation necessary. No gross profit to be recognized prior to

completion of contract.
Computation of Billings on Uncompleted Contract in Excess of Related

Costs under Completed-Contract Method.
Construction costs incurred during the year ................. $ 1,185,800

Partial billings on contract (.25 X $6,000,000) ................. (1,500,000)
$ (314,200)
(b) Contract price ............................................... $6,000,000
Costs to date ................................................. $1,185,800

Estimated costs to complete ....................... 4,204,200
Total ....................................................... 5,390,000
Estimated profit ($6,000,000 – $5,390,000) ....... 610,000

% of completion ............................................ X .22*
Gross profit ........................................... $ 134,200
*($1,185,800 / $5,390,000)
(a) May 1, 2020
Cash ............................................................................ 28,000

Notes Receivable ($70,000 – $28,000) ...................... 42,000
Discount on Notes Receivable
[$42,000 – (2.48685* X $14,000)] ..................... 7,184
[$28,000 + ($42,000 – $7,184)]......................... 62,816
July 1, 2020
Unearned Franchise Revenue................................... 62,816

Franchise Revenue ........................................... 62,816
(b) May 1, 2020
Cash ............................................................................ 28,000

[$42,000 – (2.48685* X $14,000)] ..................... 7,184
[$28,000 + ($42,000 – $7,184)]......................... 62,816
December 31, 2020
Unearned Franchise Revenue .................................. 13,959**

Franchise Revenue ........................................... 13,959
*Present value factor for 10%, 3-year ordinary annuity.

**($62,816 ÷ 3) X 8/12
(c) May 1, 2020
Cash ............................................................................ 28,000b

Notes Receivable ($70,000 – $28,000) ...................... 42,000a
[$42,000 – (2.48685* X $14,000)] ..................... 7,184c
Unearned Service Revenue (Training) ............. 2,400e
Unearned Franchise Revenue ($28,000 -
$2,400 + $42,000 – $7,184) .............................. 60,416f
July 1, 2020
Unearned Service Revenue (Training) ...................... 1,200***

Unearned Franchise Revenue ................................... 60,416
Franchise Revenue ............................................. 60,416
Service Revenue (Training)................................ 1,200
***$2,400 ÷ 2
September 1, 2020
Unearned Service Revenue (Training) ...................... 1,200*

Service Revenue ................................................ 1,200
(Calculations rounded)
*Present value of ordinary annuity 3 years at 10%.

(a) January 1, 2020
Cash ............................................................................. 10,000

Discount on Notes Receivable .......................... 10,433
($10,000 + $29,567) .......................................... 39,567
*Down payment made on 4/1/20 ................................ $10,000

Present value of an ordinary annuity
($8,000 X 3.69590*) ........................................... 29,567
Total revenue recorded by Campbell and
total acquisition cost recorded by
Lesley Benjamin............................................... $39,567
April 1, 2020
Unearned Franchise Revenue ................................... 39,567
*Present value factor for 11%, 5-year ordinary annuity.
December 31, 2020
Discount on Notes Receivable .................................. 3,252*

Interest Revenue ................................................ 3,252
*($40,000 – $10,433) X .11
(b) January 1, 2020
Cash ............................................................................ 10,000
Unearned Service Revenue (Training) ............. 3,600
Unearned Franchise Revenue ........................... 35,967
April 1, 2020
Unearned Service Revenue (Training) ..................... 900
Unearned Franchise Revenue................................... 35,967
Franchise Revenue ............................................ 35,967
Service Revenue (Training) ($3,600 X 3/12) ..... 900
December 31, 2020
Unearned Service Revenue (Training) ..................... 2,700
Service Revenue ($3,600 X 9/12) ....................... 2,700
Discount on Notes Receivable .................................. 3,252
Interest Revenue
[($40,000 – $10,433) X .11] .............................. 3,252
(c) January 1, 2020

Cash ............................................................................ 10,000
Unearned Franchise Revenue ($10,000 + $29,567) 39,567
Down payment made on 4/1/20 ................................. $10,000
Present value of an ordinary annuity (from part a) 29,567
Total revenue recorded by Campbell and
total acquisition cost recorded by
Lesley Benjamin .............................................. $39,567
December 31, 2020
Unearned Franchise Revenue ................................... 7,913**
**($39,567 ÷ 5)
Discount on Notes Receivable .................................. 3,252

Interest Revenue
[($40,000 – $10,433) X .11] ............................... 3,252
TIME AND PURPOSE OF PROBLEMS
Problem 18.1 (Time 30–35 minutes)

Purpose—to provide the student with an opportunity to determine transaction price, allocate the
transaction price to performance obligations, and account for upfront fees.

transaction price to performance obligations, and account for a contract modification.

transaction price to performance obligations, and account for discounts and time value.

transaction price to performance obligations, and account for discounts and time value.

transaction price to performance obligations, and account for returns and consignment sales.

Purpose—to provide the student with an opportunity to account for warranty and customer loyalty
programs.

Purpose—to provide the student with an understanding of the criteria and applications utilized in the
determination revenue recognition for a bonus point program. The student is required to allocate the
transaction price to the bonus points and sales revenue for the products and then prepare entries for
bonus point redemptions.

Purpose—to provide the student with an understanding of and an opportunity to determine transaction
price, allocate the transaction price to performance obligations, and account for time value, gift cards,
and discounts.
*Problem 18.9 (Time 30–40 minutes)

Purpose—to provide the student with an understanding of both the percentage-of-completion and
completed-contract methods of accounting for long-term construction contracts. The student is required
to compute the estimated gross profit that would be recognized during each year of the construction
period under each of the two methods.

Purpose—to provide the student with a long-term construction contract problem that requires the
recognition of a loss during an interim year on a contract that is profitable overall. This problem requires
application of both the percentage-of-completion method and the completed-contract method to an
interim loss situation.

Purpose—to provide the student with a long-term construction contract problem that requires the
recognition of a loss during an interim year on an unprofitable contract overall. This problem requires
application of both the percentage-of-completion method and the completed-contract method to this
unprofitable contract.
Purpose—to provide the student with an understanding of the accounting treatment accorded franchis-
ing operations. The student is required to discuss the alternatives types of franchise fees – initial
franchise fee and continuing franchise fees – and determine when fees should be recognized, at a point
in time or over time.
SOLUTIONS TO PROBLEMS
PROBLEM 18.1
(a) The total revenue of $50,000 (100 contracts X $500d) should be

allocated to the two performance obligations based on their relative
standalone selling prices. In this case, the standalone selling price of
each tablet is $250 and the standalone selling price of the internet
service is $300. The total standalone selling price to consider is $550
($250 + $300) for each contract. The allocation for each contract is as
follows:
Tablet ($250 / $550) X $500 = $227

Internet Service ($300 / $550) X $500 = $273
January 2, 2020
Cash ($500 X 100)....................................................... 50,000

Unearned Service Revenue (100 X $273) ......... 27,300
Sales Revenue (100 X $ 227) ............................. 22,700
Cost of Goods Sold ($175 X 100) .............................. 17,500

Inventory ............................................................. 17,500
The sale of the tablets (and gross profit) should be recognized once
the tablets are delivered on January 2, 2020.
December 31, 2020
Unearned Service Revenue ($27,300 ÷ 3) ................ 9,100

Service Revenue ................................................. 9,100
(To record revenue for internet service provided in 2020)
(b) Bundle B contains three different performance obligations: (1) the

tablet, (2) internet service, and (3) tablet service plan.
PROBLEM 18.1 (Continued)
The total revenue of $120,000 (200 contracts X $600) should be allocated to

the three performance obligations based on their relative standalone
selling prices:
Tablet $250
Internet service 300
Tablet service plan 150
Total estimated standalone price $700
The allocation for a single contract is as follows:
Tablet $214 ($250 / $700) X $600

Internet service 257 ($300 / $700) X $600
Tablet service 129 ($150 / $700) X $600
Total Revenue $600
Tablet Tailors makes the following entries for 200 Tablet Bundle B:
July 1, 2020
Cash ($600l X 200) ...................................................... 120,000

Unearned Service Revenue (Internet) ............... 51,400*
Unearned Service Revenue (Maintenance) ...... 25,800**
Sales Revenue ($214 X 200) ............................... 42,800

Inventory .............................................................. 35,000
*200 X $257
**200 X $129
The sale of the tablets (and gross profit) should be recognized once the
tablets are delivered on July 1, 2020.
December 31, 2020
Unearned Service Revenue (Internet)

[($51,400 ÷ 3) X 6/12] .............................................. 8,567
Unearned Service Revenue (Maintenance)
[($25,800 ÷ 3) X 6/12] .............................................. 4,300
Service Revenue ................................................. 12,867
(To record revenue for internet and maintenance services provided in

2020)
(c) Without reliable data with which to estimate the standalone selling
price of the internet service Tablet Tailors allocates $250 for each
contract to revenue on the tablets, with the residual amount allocated
to the Internet service. Tablet Tailors makes the following entries:
January 2, 2020
Cash ($500 X 100)....................................................... 50,000

Unearned Service Revenue
(Internet) ($50,000 − $25,000) ......................... 25,000
Sales Revenue (Equipment) ($250 X 100) ........ 25,000

Inventory ............................................................. 17,500
December 31, 2020
Unearned Service Revenue ($25,000 ÷ 3) ................ 8,333

Service Revenue ................................................. 8,333
(To record revenue for internet service provided in 2020)
Tablet Tailors will recognize service revenue of $8,333 ($25,000 ÷ 3) in

each year of the 3-year contract.
PROBLEM 18.2
Since the services in the extended period are the same as those provided
in the original contract period, the services are not distinct; the
modification should be considered as part of the original contract.
(a)
January 2, 2020
Cash (40 X $90) ........................................................... 3,600

Unearned Service Revenue................................ 3,600
(To record cash received for 40 extended internet service contracts)
(b)
December 31, 2020
Unearned Service Revenue ....................................... 2,413

Service Revenue ($7,240* ÷ 3) ........................... 2,413
*Original Internet Service Contract (40 X $273) $10,920

Revenue recognized in first 2 years ($10,920 X 2/3) (7,280)
Remaining Service at original rates 3,640
Extended service 3,600
Total Unearned Revenue (3 years of service) $ 7,240
LO: 2, 3, 4, Bloom: AP, Difficulty: Moderate, Time: 20-25, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
PROBLEM 18.3
(a) The total revenue of $8,000 ($800 X 10) should be allocated to the two
performance obligations based on their relative standalone selling
prices. In this case, the standalone selling price of the grills is
considered $7,000 ($700 X 10) and the standalone selling price of the
installation fee is $1,500 ($150 X 10). The total standalone selling price
to consider is therefore $8,500 ($7,000 + $1,500). The allocation is as
follows.
Equipment ($7,000 / $8,500) X $8,000 = $6,588

Installation ($1,500 / $8,500) X $8,000 = $1,412
Grill Masters makes the following entries:
April 20, 2020
Cash ............................................................................ 8,000

Unearned Service Revenue (Installation) ......... 1,412
Unearned Sales Revenue (Equipment) ............ 6,588
May 15, 2020
Unearned Service Revenue (Installation) ................ 1,412

Unearned Sales Revenue (Equipment) .................... 6,588
Service Revenue (Installation) .......................... 1,412
Sales Revenue (Equipment) .............................. 6,588

Inventory ($425 X 10) ......................................... 4,250
Both the sale of the equipment and the service revenue are recognized
once the installation is completed on May 15, 2020.
(b) April 17, 2020
Cash ............................................................................ 52,640

Sales Revenue [($200 X 280) X (1.0 - .06)] ........ 52,640
Cost of Goods Sold ................................................... 44,800

Inventory (280 X $160) ....................................... 44,800
In this case, Grill Masters should reduce revenue recognized by $3,360

which is computed as the selling price of the grills $52,640 [($280 X
200) – ($56,000 X .06)], because it is probable (almost certain) that it
will provide the discounted price amounting to 6%.
(c) 1. September 1, 2020
Accounts Receivable
[($100 X 20) – (.03 X $20,000)] ......................... 19,400
Sales Revenue ............................................. 19,400
Cost of Goods Sold ............................................. 11,000
Inventory ($550 X 20) .................................. 11,000
September 25, 2020
Cash ..................................................................... 19,400

Accounts Receivable .................................. 19,400
2. September 1, 2020
Accounts Receivable
[(100 X $20) – (.03 X $20,000)] ......................... 19,400
Sales Revenue ............................................. 19,400
Cost of Goods Sold............................................. 11,000
Inventory ($550 X 20) .................................. 11,000
October 15, 2020
Cash ($1,000 X 20) .............................................. 20,000

Accounts Receivable .................................. 19,400
Sales Discounts Forfeited
(.03 X $20,000) .......................................... 600
(d) October 1, 2020
Notes Receivable ....................................................... 5,324

Sales Revenue ($5,324 X .75132*) ..................... 4,000

Inventory ............................................................. 2,700
*Present value factor for 10%, 3 years
December 31, 2020
Discount on Notes Receivable.................................. 100

Interest Revenue (.10 X 3/12 X $4,000) ............. 100
Grill Masters records revenue of $4,000 on October 1, 2020, which is

the value of consideration received, based on the present value of the
note. As a practical expedient, companies are not required to reflect
the time value of money to determine the transaction price if the time
period for payment is less than a year or if it is not a significant
financing transaction.
PROBLEM 18.4
(a) The entry to record the sale is as follows:
June 1, 2020

Sales Revenue .......................................... 70,000

Inventory ($400 X 100) ............................ 40,000
NOTE TO INSTRUCTOR: The entries to record the sale and related cost of
goods sold at net amounts is as follows:
June 1, 2020

Refund Liability (.04 X $70,000) ............... 2,800
Sales Revenue .......................................... 67,200
Estimated Inventory Returns
(.04 X $40,000) .............................................. 1,600
Inventory ($400 X 100) ............................ 40,000
(b) 1. May 1, 2020
Cash [.20 X (300 X $1,800)] ....................... 108,000

Unearned Sales Revenue .................. 108,000
2. August 1, 2020
Cash [.80 X ($1,800 X 300)] ......................... 432,000

Unearned Sales Revenue .......................... 108,000
Sales Revenue ($1,800 X 300)........... 540,000
Cost of Goods Sold ................................... 280,500

Inventory [300 X ($260 + $275 + $400)] 280,500
(c) The introduction of bonus payment gives rise to a change in the

transaction price for the revenue arrangement, to include an
adjustment for management’s estimate of the amount of consideration
to which Economy will be entitled. With just two possible outcomes,
Economy uses the “most-likely-amount” approach, resulting in a
transaction price of $594,000 [($1,800 X 300) X 1.10].
May 1, 2020
Cash [.20 X ($1,800 X 300)] ............................. 108,000

Unearned Sales Revenue ........................ 108,000
July 1, 2020
Cash ($594,000 – $108,000) ............................ 486,000

Unearned Sales Revenue ................................ 108,000
Sales Revenue .......................................... 594,000

Inventory [300 X ($400 + $275 + $260)] ... 280,500
(d) This is a bill-and-hold arrangement. It appears that the criteria for Epic
to have obtained control of the appliance bundles have been met:

(b) The product must be identified separately as belonging to Epic
Rentals.
(c) The product currently must be ready for physical transfer to Epic.
(d) Economy cannot have the ability to use the product or to direct it
to another customer.
Economy makes the following entries.
February 1, 2020
Cash (.10 X 400 X $1,800) ............................... 72,000

Unearned Sales Revenue ........................ 72,000
April 1, 2020
Accounts Receivable ($720,000 – $72,000) ... 648,000

Unearned Sales Revenue.................................... 72,000
Sales Revenue (400 X $1,800).................. 720,000

Inventory [400 X ($400 + $275 + $260)] .. 374,000
Thus, Economy has transferred control to Epic; Economy has a right

to payment for the appliances and legal title has transferred.
LO: 10, Bloom: AP, Difficulty: Complex, Time: 35-40, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
PROBLEM 18.5
(a) If sales with returns are recorded gross at point of sale, the following
entries are made.
January 1, 2020
Notes Receivable.............................................. 48,000

Sales Revenue (40 X $1,200) ................... 48,000
Cost of Goods Sold (40 X $800) ..................... 32,000
Inventory ................................................... 32,000
Returns are recorded as they occur, with a debit to returned inventory and
a credit to cost of goods sold. If any returns are outstanding at the end of
the period, an adjusting entry will be required.
Note to Instructor: Ritt makes the following entry if the sale is recorded net.
January 1, 2020
Notes Receivable (Mills) ................................... 48,000

Refund Liability (.05 X $48,000) .............. 2,400
Sales Revenue .......................................... 45,600
Estimated Inventory Returns
(40 X $800 X .05) ........................................... 1,600
Inventory (40 X $800) ............................... 32,000
(b) August 10, 2020
Accounts Receivable (16 X $3,600*) ................ 57,600

Sales Revenue .......................................... 57,600

Inventory (16 X $2,000) ............................ 32,000
*Note: There is no adjustment for the volume discount, because it is

not probable that the customer will reach the benchmark.
(c) This revenue arrangement has 3 different performance obligations:

(1) the sale of the dryers, (2) installation, and (3) the maintenance plan.
The total revenue of $45,200i should be allocated to the three

performance obligations based on their relative standalone selling
price:
Dryers (3 X $14,000) $42,000

Installation (3 X $1,000) 3,000
Maintenance plan 1,200
Total estimated standalone selling price $46,200
The allocation for a single contract is as follows.
Dryers $41,091 ($42,000 / $46,200) X $45,200

Installation 2,935 ($3,000 / $46,200) X $45,200
Maintenance plan 1,174 ($1,200 / $46,200) X $45,200
Total Revenue $45,200
Ritt makes the following entries.
June 20, 2020
Cash (.20 X $45,200) ............................................ 9,040

Accounts Receivable ($45,200 – $9,040) ....... 36,160
(Installation) .......................................... 2,935
(Maintenance Plan) ............................... 1,174
Unearned Sales Revenue (Dryers) ......... 41,091
October 1, 2020
Cash (.80 X $45,200i) ....................................... 36,160

Accounts Receivable ............................... 36,160
Unearned Service Revenue (Installation) ......... 2,935

Unearned Sales Revenue (Dryers)................. 41,091
Service Revenue (Installation) ................ 2,935
Sales Revenue (Dryers) ........................... 41,091

Inventory (3 X $11,000) ............................ 33,000
December 31, 2020
Unearned Service Revenue (Maintenance

Plans) .................................................................. 98
Service Revenue (Maintenance Plans)
($1,174 X 3/36) ....................................... 98
(d) Entries for Ritt

April 25, 2020
Inventory (Consignments) (100 X $800) ........... 80,000

Finished Goods Inventory ....................... 80,000
June 30, 2020
Cash [(60 X $1,200) – (.10 X 60 X $1,200)] ......... 64,800

Commission Expense (Consignments)
($72,000 X .10) .................................................... 7,200
Revenue from Consignment Sales ......... 72,000
(60 X $1,200)
Cost of Goods Sold (60 X $800) ......................... 48,000

Inventory (Consignments) ....................... 48,000
Entries for Farm Depot

April 25, 2020
No entry – Inventory continues to be controlled by Ritt.
Summary Entry for Consignment Sales
Cash (60 X $1,200)................................................ 72,000

Payable to Consignor .............................. 64,800
Commission Revenue ($72,000 X .10) ... 7,200
June 30, 2020
Payable to Consignor .......................................... 64,800

Cash .......................................................... 64,800
LO: 2, 3, 4, Bloom: AP, Difficulty: Complex, Time: 35-40, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
PROBLEM 18.6
(a) Warranty Performance Obligations

1. To transfer 70 specialty winches to customers with a total
transaction price of $21,000.
2. To provide extended warranty services for 20 winches after the
assurance warranty period with a value of $8,000 (20 X $400) for
2 years.
With respect to the bonus points program, Hale has a performance

obligation for:
1. Delivery of the products and,

2. Future delivery of products that can be purchased by customers
with bonus point earned.
(b)
Cash ....................................................................... 29,000
Unearned Warranty Revenue
(20 X $400) ............................................. 8,000
Sales Revenue .......................................... 21,000
To reduce inventory and recognize cost of goods sold:
Inventory ................................................... 16,000
Hale records Warranty Expense account over the first two years as the
actual warranty costs are incurred. An adjusting entry is recorded at
year-end to recognize estimated warranty liabilities to be honored in
the future. The company also recognizes revenue related to the service
type warranty over the three-year period that extends beyond the
assurance warranty period (two years). In most cases, the unearned
warranty revenue is recognized on a straight-line basis and the costs
associated with the service type warranty are expensed as incurred.
(c) Because the points provide a material right to a customer that it would
not receive without entering into a contract, the points are a separate
performance obligation. Hale allocates the transaction price to the
product and the points on a relative standalone selling price basis as
follows.
The standalone selling price:

Purchased products: $100,000
Estimated points to be redeemed 9,500
Total $109,500
The allocation is as follows.
Products ($100,000 / $109,500) X $100,000 = $91,324

Bonus Points ($9,500 / $109,500) X $100,000 = $ 8,676
To record sales of products subject to bonus points:
Cash .................................................................. 100,000

Liability to Bonus Point Customers ....... 8,676
Sales Revenue ......................................... 91,324
Cost of Goods Sold (1–0.45) X 100,000 ......... 55,000

Inventory................................................... 55,000
(d) Additional Sales Revenue from bonus point redemptions, if 4,500

points have been redeemed: (4,500 points ÷ 9,500 points X $8,676) =
$4,110.
PROBLEM 18.7
(a) The transaction price is allocated to the products and loyalty points, as
follows:
Total
Standalone Percent Transaction Allocated
Selling Prices Allocated Price Amounts
Product Purchases $300,000 80% $300,000 $240,000
Loyalty Points 75,000* 20% 300,000 60,000
$375,000 $300,000
*30,000 X $2.50
(b) July 2, 2020
Cash ................................................................. 300,000

Unearned Sales Revenue……… ............. 60,000
Sales Revenue ……………………… ........ 240,000

Inventory…………………………….. ......... 171,000
(c) At July 31, 2020, the revenue recognized as a result of the loyalty
points redeemed is $24,000 [$60,000 X (10,000 ÷ 25,000)].
PROBLEM 18.8
(a) Sales with financing
January 1, 2020
Notes Receivable ............................................. 5,000

Discount on Notes Receivable ............... 550
Sales Revenue
($5,000 X .89*)........................................ 4,450

Inventory................................................... 4,000
*Present value factor for 6% and 2 years
Total revenue for Colbert
Sales revenue $4,450 [Gross profit = $450 =

Interest revenue (0.06 X $4,450) 267 ($4,450 - $4,000)]
$4,717
(b) Gift Cards

March 1, 2020
Cash .................................................................. 2,000

Unearned Sales Revenue (20 X $100) .... 2,000
March 31, 2020
Unearned Sales Revenue ................................ 1,000

Sales Revenue (.50 X 20 X $100) ............ 1,000

Inventory (0.50 X 20 X $80) ..................... 800
April 30, 2020
Unearned Sales Revenue ................................ 600

Sales Revenue (0.30 X 20 X $100) .......... 600

Inventory (0.30 X 20 X $80) ..................... 480
June 30, 2020
Unearned Sales Revenue ............................... 100

Sales Revenue (0.05 X 20 X $100) ........... 100

Inventory (0.05 X 20 X $80) ...................... 80
In addition, an additional entry is made on June 30, 2020 to recognize

that 10% of the gift cards (2 cards) will not be redeemed.
June 30, 2020
Unearned Sales Revenue ............................... 200

Sales Revenue (0.10 X 20 X $100) ........... 200
There is no cost of goods sold related to the last 2 gift cards as they
were not redeemed.
*PROBLEM 18.9
(a) 2020 2021 2022

Contract price $900,000 $900,000 $900,000
Less estimated cost:
Costs to date 270,000 450,000 610,000
Estimated cost to complete 330,000 150,000 —
Estimated total cost 600,000 600,000 610,000
Estimated total gross profit $300,000 $300,000 $290,000
Gross profit recognized in—
2020: $270,000 X $300,000 = $135,000

$600,000
2021: $450,000 X $300,000 = $225,000

$600,000
Less 2020 recognized

gross profit 135,000g
Gross profit in 2021 $ 90,000
2022: Less 2020–2021
recognized gross profit
225,000h
Gross profit in 2022 $ 65,000
(b) In 2020 and 2021, no gross profit would be recognized.
Total billings ...................................... $900,000

Total cost ............................................ (610,000)
Gross profit recognized in 2022 ....... $290,000
LO: 5, 6, Bloom: AP, Difficulty: Complex, Time: 30-40, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
*PROBLEM 18.10
(a) Computation of Recognizable Profit/Loss

Percentage-of-Completion Method
2020
Costs to date (12/31/20) ............................................ $2,880,000
Estimated costs to complete ................................... 3,520,000
Estimated total costs ........................................ $6,400,000
Percent complete ($2,880,000 ÷ $6,400,000) ........... 45%
Revenue recognized ($8,400,000 X .45) .................. $3,780,000

Costs incurred ........................................................... (2,880,000)
Profit recognized in 2020.......................................... $ 900,000
2021
Costs to date (12/31/21)
($2,880,000 + $2,230,000) ...................................... $5,110,000
Estimated costs to complete ................................... 2,190,000
Estimated total costs ........................................ $7,300,000
Percent complete ($5,110,000 ÷ $7,300,000) ........... 70%

Revenue recognized in 2021
($8,400,000 X .70) – $3,780,000 ............................ $2,100,000
Costs incurred in 2021.............................................. (2,230,000)
Loss recognized in 2021........................................... $ (130,000)
2022
Total revenue recognized ......................................... $8,400,000
Total costs incurred .................................................. (7,300,000)
Total profit on contract ............................................. 1,100,000
Deduct profit previously recognized
($900,000 – $130,000) ............................................ 770,000
Profit recognized in 2022.......................................... $ 330,000
(b) No profit or loss recognized in 2020 and 2021
2022
Contract price ........................................................... $8,400,000

Costs incurred .......................................................... 7,300,000
Profit recognized ...................................................... $1,100,000
*PROBLEM 18.11
(a) Computation of Recognizable Profit/Loss

Percentage-of-Completion Method
2020
Costs to date (12/31/20) ................................................. $ 300,000

Estimated costs to complete ........................................ 1,200,000
Estimated total costs ............................................. $1,500,000
Percent complete ($300,000 ÷ $1,500,000) ................... 20%
Revenue recognized ($1,900,000 X .20) ....................... $ 380,000

Costs incurred ................................................................ (300,000)
Profit recognized in 2020............................................... $ 80,000
2021
Costs to date (12/31/21) ................................................. $1,200,000

Estimated costs to complete ........................................ 800,000
Estimated total costs ............................................. 2,000,000
Contract price ................................................................. (1,900,000)
Total loss ........................................................................ $ 100,000
Total loss ........................................................................ $ 100,000

Plus gross profit recognized in 2020 ........................... 80,000
Loss recognized in 2021................................................ $ 180,000
2022
Costs to date (12/31/22) ........................................ $2,100,000

Estimated costs to complete ................................ 0
2,100,000
Contract price ........................................................ 1,900,000
Total loss ................................................................ $ 200,000
Total loss ................................................................ $ 200,000

Less: Loss recognized in 2021 ............................ $180,000
Gross profit recognized in 2020 ................ (80,000) 100,000
Loss recognized in 2022 ....................................... $ 100,000)
(b) No profit or loss in 2020
2021
Contract price ........................................................ $1,900,000

Estimated costs ..................................................... (2,000,000)
Loss recognized ................................................... $ 100,000
2022
Contract price ........................................................ $1,900,000

Costs incurred ....................................................... (2,100,000)
Total loss ................................................................ 200,000
Less: Loss recognized in 2021 ............................. 100,000
Loss recognized ................................................. $ 100,000
LO: 5, 6, 7, Bloom: AP, Difficulty: Complex, Time: 40-50, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
*PROBLEM 18.12
(a) A company recognizes revenue in the accounting period when a

performance obligation is satisfied—the revenue recognition principle.
A key element of the revenue recognition principle is that a company
recognizes revenue to depict the transfer of goods or services to
customers in an amount that reflects the consideration that it receives,
or expects to receive, in exchange for those goods or services.
Companies satisfy performance obligations either at a point in time or

over a period of time. Companies recognize revenue over a period of
time if one of the following two criteria is met.
1. The customer receives and consumes the benefits as the seller

performs.
2. The customer controls the asset as it is created or enhanced (e.g.,

a builder constructs a building on a customer’s property).
3. The company does not have an alternative use for the asset
created or enhanced (e.g., an aircraft manufacturer builds
specialty jets to a customer’s specifications) and either (a) the
customer receives benefits as the company performs and
therefore the task would not need to be re-performed, or (b) the
company has a right to payment and this right is enforceable.
In the case of a franchise, fees related to rights to use the intellectual

property generally are recognized at a point in time, usually when the
franchise begins operation. That is because at that time, the customer
controls the product or service when it has the ability to direct the use
of and obtain substantially all the remaining benefits from the
franchise rights. Control also includes the customer’s ability to
prevent other companies from directing the use of, or receiving the
benefit, from the asset or service.
The continuing franchise fees are recognized over time because they
are in exchange for products and services transferred to the
franchisee during the franchise period.
(b)
1. January 5, 2020
Cash ................................................... 20,000

Notes Receivable .............................. 100,000
($100,000 – $75,816*) ............... 24,184
Unearned Franchise Revenue .... 95,816
*Present value of future payments ($20,000 X 3.79079)
July 1, 2020
2. Unearned Franchise Revenue ......... 20,000

Franchise Revenue ...................... 20,000
To record revenue from delivery of

franchise rights.
December 31, 2020
Cash ($260,000 X .02) ....................... 5,200

Franchise Revenue ................ 5,200
(to recognize continuing franchise fees)

($75,816 ÷ 60 X 6) .......................................... 7,582
Franchise Revenue .................................. 7,582
(To recognize ongoing fees for brand maintenance)
Cash………………………………………………. 20,000
Discount on Notes Receivable ....................... 7,582
Interest Revenue ($75,816 X .10)............... 7,582
Notes Receivable…………………………… 20,000
(To recognize collection of note and interest revenue)
(c) In this situation Amigos would recognize the entire franchise fee of
$95,816 when the franchise opens. That is, franchise revenue is
recognized at a point in time.
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 18.1 (Time 20–30 minutes)

Purpose—to provide the student an opportunity to describe the 5-step revenue recognition model and
explain the importance of fair value measurement and the definitions of asset and liabilities to
application of the 5-step model.

Purpose—to provide the student an opportunity to describe the revenue recognition principle and the
importance of control.

Purpose—to provide the student with an understanding of the conceptual merits of recognizing revenue
at the point of sale. The student is required to explain and defend the reasons why the point of sale is
usually used as the basis for the timing of revenue recognition, plus describe the situations where
revenue would be recognized over time.

Purpose—to provide the student with an understanding of the conceptual factors underlying the
recognition of revenue. The student is required to explain and justify why revenue is often recognized
as earned at the time of sale, the situations when it would be appropriate to recognize revenue over
time.

Purpose— to provide the student with an understanding of the conceptual factors underlying the
recognition of revenue. The student is required to explain the factors that result in the constraint of or
deferral of revenue recognition.

Purpose—to provide the student an opportunity to explain how a magazine publisher should recognize
subscription revenue. The case is complicated by a 25% return rate and a premium offered to
subscribers. The effect on the current ratio must be discussed.

Purpose—to provide the student with an understanding of the criteria and applications utilized in the
determination of revenue recognition for a bonus point program. The student is required to discuss the
factors to be considered in determining when revenue should be recognized, plus apply these factors in
discussing the accounting alternatives that should be considered for the recognition of revenues and
related expenses with regard to the information presented in the case.

Purpose—to provide the student an ethical situation related to the recognition of revenue from
membership fees.
*CA 18.9 (Time 20–25 minutes)

Purpose—to provide the student an opportunity to discuss the theoretical justification for use of the
percentage-of-completion method. The student explains how progress billings are accounted for and
how to determine the income recognized in the second year of a contract by the percentage-
of-completion method. The student indicates the effect on earnings per share in the second year of
a four-year contract from using the percentage-of-completion method instead of the completed-contract
method.
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 18.1
(a) The 5-step model is as follows.
1. Identify the contract with customers.
A contract is an agreement that creates enforceable rights or obligations and (1) has
commercial substance, (2) has been approved and both parties are committed to
performing their obligations, (3) the company can identify each party’s rights regarding the
goods or services to be transferred, (4) the payment terms, and (5) it is probable that
consideration will be collected. A company applies the revenue guidance to contracts with
customers and must determine if new performance obligations are created by a contract
modification.
2. Identify the separate performance obligations in the contract.
A performance obligation is a promise in a contract to provide a product or service to a

customer. A performance obligation exists if the customer can benefit from the good or
service on its own or together with other readily available resources. A contract may be
comprised of multiple performance obligations. The accounting for multiple performance
obligations is based on evaluation of whether the product or service is distinct within the
contract. If each of the goods or services is distinct, but is interdependent and interrelated,
these goods and services are combined and reported as one performance obligation. In
other words, the objective is to determine whether the nature of a company’s promise is to
transfer individual goods and services to the customer or to transfer a combined item (or
items) for which individual goods or services are inputs.
3. Determine the transaction price.
The transaction price is the amount of consideration that a company expects to receive from
a customer in exchange for transferring goods and services. In determining the transaction
price, companies must consider the following factors: (1) variable consideration, (2) time
value of money, (3) noncash consideration, (4)consideration paid to a customer, and (5)
upfront cash payments.
4. Allocate the transaction price to separate performance obligations.
If there is more than one performance obligation, allocate the transaction price based on
what the good or service could be sold for on a standalone basis (standalone selling price).
Estimates of standalone selling price can be based on (1) adjusted market assessment, (2)
expected cost plus a margin approach, or (3) a residual approach.
5. Recognize revenue when each performance obligation is satisfied.
A company satisfies its performance obligation when the customer obtains control of the
good or service. Companies satisfy performance obligations either at a point in time or over
a period of time. Companies recognize revenue over a period of time if one of the following
three criteria is met.
(1) The customer receives and consumes the benefits as the seller performs.
CA 18.1 (Continued)
(2) The customer controls the asset as it is created or enhanced (e.g., a builder constructs
a building on a customer’s property).
(3) The company does not have an alternative use for the asset created or enhanced (e.g.,
an aircraft manufacturer builds specialty jets to a customer’s specifications) and either (a)
the customer receives benefits as the company performs and therefore the task would not
need to be re-performed, or (b) the company has a right to payment and this right is
enforceable.
(b) A contract is an agreement between two or more parties that creates enforceable rights or
obligations. Contracts can be written, oral, or implied from customary business practice. By
definition, revenue from a contract with a customer cannot be recognized until a contract exists.
On entering into a contract with a customer, a company obtains rights to receive consideration
from the customer and assumes obligations to transfer goods or services to the customer
(performance obligations).
In some cases, there are multiple contracts related to the transaction, and accounting for each
contract may or may not occur, depending on the circumstances. These situations often develop
when not only a product is provided, but some type of service is performed as well.
(c) Companies often have to allocate the transaction price to more than one performance obligation in
a contract. If an allocation is needed, the transaction price allocated to the various performance
obligations is based on standalone selling prices. If this information is not available, companies
should use their best estimate of what the good or service might sell for as a standalone unit.
Depending on the circumstances, companies use the following approaches to determine
standalone selling price: (1) Adjusted market assessment approach - Evaluate the market in which
it sells goods or services and estimate the price that customers in that market are willing to pay for
those goods or services. That approach also might include referring to prices from the company’s
competitors for similar goods or services and adjusting those prices as necessary to reflect the
company’s costs and margins; (2) Expected cost plus a margin approach - Forecast expected
costs of satisfying a performance obligation and then add an appropriate margin for that good or
service; or (3) Residual approach - If the standalone selling price of a good or service is highly
variable or uncertain, then a company may estimate the standalone selling price by reference to
the total transaction price less the sum of the available standalone selling prices of other goods or
services promised in the contract. A selling price is highly variable when a company sells the same
good or service to different customers (at or near the same time) for a broad range of amounts. A
selling price is uncertain when a company has not yet established a price for a good or service and
the good or service has not previously been sold.
(d) Companies use an asset-liability model to recognize revenue. For example, when a company
delivers a product (satisfying its performance obligation), it has a right to consideration and
therefore has a contract asset. If, on the other hand, the customer performs first, by prepaying,
the seller has a contract liability. Companies must present these contract assets and contract
liabilities on their balance sheets. Contract assets are of two types: (1) unconditional rights to
receive consideration because the company has satisfied its performance obligation with a
customer, and (2) conditional rights to receive consideration because the company has satisfied
one performance obligation but must satisfy another performance obligation in the contract
before it can bill the customer. Companies should report unconditional rights to receive
consideration as a receivable on the balance sheet. Conditional rights on the balance sheet
should be reported separately as contract assets. A contract liability is a company’s obligation to
transfer goods or services to a customer for which the company has received consideration from
the customer. It is generally shown in an unearned revenue account.
LO: 2, 3, Bloom: K, C, Difficulty: Moderate, Time: 20-30, AACSB: Reflecting thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
CA 18.2
(a) A company recognizes revenue in the accounting period when a performance obligation is
satisfied—the revenue recognition principle. A key element of the revenue recognition principle is
that a company recognizes revenue to depict the transfer of goods or services to customers in an
amount that reflects the consideration that it receives, or expects to receive, in exchange for
those goods or services.
Companies satisfy performance obligations either at a point in time or over a period of time.
Companies recognize revenue over a period of time if one of the following three criteria is met.
The concept of change in control is the deciding factor in determining when a performance
obligation is satisfied. The customer controls the product or service when it has the ability to
direct the use of and obtain substantially all the remaining benefits from the asset or service.
Control also includes the customer’s ability to prevent other companies from directing the use of,
or receiving the benefit, from the asset or service. Indicators that the customer has obtained
control are as follows:

(b) Companies use an asset-liability model to recognize revenue. For example, when a company
delivers a product (satisfying its performance obligation), it has a right to consideration and
therefore has a contract asset. If, on the other hand, if the customer performs first, by prepaying,
the seller has a contract liability. Companies must present these contract assets and contract
liabilities on their balance sheets. Contract assets are of two types: (1) unconditional rights to
receive consideration because the company has satisfied its performance obligation with a
customer, and (2) conditional rights to receive consideration because the company has satisfied
one performance obligation but must satisfy another performance obligation in the contract
before it can bill the customer. Companies should report unconditional rights to receive
consideration as a receivable on the balance sheet. Conditional rights on the balance sheet
should be reported separately as contract assets. A contract liability is a company’s obligation to
transfer goods or services to a customer for which the company has received consideration from
the customer.
CA 18.2 (Continued)
(c) Collectibility refers to a customer’s credit risk—that is, the risk that a customer will be unable to
pay the amount of consideration in accordance with the contract. Any time a company sells a
product or performs a service on account, a collectibility issue occurs. Will the customer pay the
promised consideration? Whether a company will get paid for satisfying a performance obligation
is not a consideration in determining revenue recognition. The amount recognized is not adjusted
for customer credit risk. Rather, companies report the revenue gross and then present an
allowance for any impairment due to bad debts (recognized initially and subsequently in
accordance with the respective bad debt guidance) prominently as an operating expense in the
income statement.
If significant doubt exists at contract inception about collectibility, it often indicates that the parties
are not committed to their obligations. As a result, it may mean that the existence of a contract is
not met.
LO: 1, 2, 3, Bloom: K, C, Difficulty: Moderate, Time: 20-30, AACSB: Reflective thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
CA 18.3
(a) The point of sale is the most widely used basis for the timing of revenue recognition because in
most cases it provides the degree of objective evidence that control has transferred to the
customer. In other words, sales transactions with outsiders represent the point in the revenue-
generating process when most of the uncertainty about satisfying a performance obligation is
resolved.
(b) 1. Though it is recognized that revenue is earned throughout the entire production process,
generally it is not feasible to measure revenue on the basis of operating activity. It is not
feasible because of the absence of suitable criteria for consistently and objectively arriving
at a periodic determination of the amount of revenue to recognize.
Also, in most situations the sale represents the most important single step in satisfying a
performance obligation. Prior to the sale, the amount of revenue anticipated from the
processes of production is merely prospective revenue; its realization remains to be
validated by actual sales. The accumulation of costs during production does not alone
generate revenue. Rather, revenues are recognized by the completion of the entire
process, including making sales.
Thus, as a general rule, the sale cannot be regarded as being an unduly conservative basis
for the timing of revenue recognition. Except in unusual circumstances, revenue recognition
prior to sale would be anticipatory in nature and unverifiable in amount.
2. To criticize the sales basis as not being sufficiently conservative because accounts receiv-
able do not represent disposable funds, it is necessary to assume that the collection of
receivables is the decisive step in satisfying a performance obligation and that periodic
revenue measurement and, therefore, net income should depend on the amount of cash
generated during the period. This assumption disregards the fact that the sale usually
represents the decisive factor in satisfying a performance obligation and substitutes for it
the administrative function of managing and collecting receivables. In other words, the
investment of funds in receivables should be regarded as a policy designed to increase total
revenues, properly recognized at the point of sale, and the cost of managing receivables
(e.g., bad debts and collection costs) should be matched with the sales in the proper period.
CA 18.3 (Continued)
The fact that some revenue adjustments (e.g., sales returns) and some expenses (e.g., bad
debts and collection costs) may occur in a period subsequent to the sale does not detract
from the overall usefulness of the sales basis for the timing of revenue recognition. Both
can be estimated with sufficient accuracy so as not to detract from the reliability of reported
net income.
Thus, in the vast majority of cases for which the sales basis is used, estimating errors, though
unavoidable, will be too immaterial in amount to warrant deferring revenue recognition to
a later point in time.
(c) Over time. This basis of recognizing revenue is frequently used by firms whose major
source of revenue is long-term construction projects. For these firms the point of sale is far
less significant to satisfying a performance obligation than is production activity because the
sale is assured under the contract (except of course where performance is not substantially
in accordance with the contract terms).
To defer revenue recognition until the completion of long-term construction projects could
impair significantly the usefulness of the intervening annual financial statements because
the volume of contracts completed during a period is likely to bear no relationship to produc-
tion volume. During each year that a project is in process, a portion of the contract price is,
therefore, appropriately recognized as that year’s revenue. The amount of the contract price
to be recognized should be proportionate to the year’s production progress on the project.
Income might be recognized on a production basis for some products whose salability at
a known price can be reasonably determined as might be the case with some precious
metals and agricultural products.
It should be noted that the use of the production basis in lieu of the sales basis for the
timing of revenue recognition is justifiable only when total profit or loss on the contracts can
be estimated with reasonable accuracy and its ultimate realization is reasonably assured.
CA 18.4
(a) Recognizing revenue at point of sale is appropriate for many revenue arrangements because this
is the time at which control of the asset transfers to the customer. That is, the concept of change
in control is the deciding factor in determining when a performance obligation is satisfied. The
customer controls the product or service when it has the ability to direct the use of and obtain
substantially all the remaining benefits from the asset or service. Control also includes the
customer’s ability to prevent other companies from directing the use of, or receiving the benefit,
from the asset or service. Change in control indicators are as follows:

Thus, for many revenue arrangements (for delivery of goods and/or services), these indicators
are present at point-of-sale.
CA 18.4 (Continued)
(b) Companies recognize revenue over a period of time if one of the following three criteria is met.
A company recognizes revenue from a performance obligation over time by measuring the
progress toward completion. The method selected for measuring progress should depict the
transfer of control from the company to the customer. Companies use various methods to
determine the extent of progress toward completion. The most common are the cost-to-cost and
units-of-delivery methods. The objective of all these methods is to measure the extent of
progress in terms of costs, units, or value added. Companies identify the various measures
(costs incurred, labor hours worked, tons produced, floors completed, etc.) and classify them as
input or output measures.
Input measures (e.g., costs incurred and labor hours worked) are efforts devoted to a contract.
Output measures (with units of delivery measured as tons produced, floors of a building
completed, miles of a highway completed, etc.) track results. Neither is universally applicable to
all long-term projects. Their use requires the exercise of judgment and careful tailoring to the
circumstances.
Both input and output measures have certain disadvantages. The input measure is based on an
established relationship between a unit of input and productivity. If inefficiencies cause the
productivity relationship to change, inaccurate measurements result.
Another potential problem is front-end loading, in which significant upfront costs result in higher
estimates of completion. To avoid this problem, companies should disregard some early-stage
construction costs—for example, costs of uninstalled materials or costs of subcontracts not yet
performed—if they do not relate to contract performance.
Similarly, output measures can produce inaccurate results if the units used are not comparable in
time, effort, or cost to complete. For example, using floors (stories) completed can be deceiving.
Completing the first floor of an eight-story building may require more than one-eighth the total
cost because of the substructure and foundation construction.
The most popular input measure used to determine the progress toward completion is the cost-
to-cost basis. Under this basis, a company measures the percentage of completion by comparing
costs incurred to date with the most recent estimate of the total costs required to complete the
contract. The percentage-of- completion method is discussed more fully in Appendix 18A, which
examines the accounting for long-term contracts.
CA 18.5
(a) Fahey will likely report $2,000,000 at the financial reporting date, the date of sale if using the
gross method. Under the net method Fahey will report $1,700,000 ($2,000,000 − $300,000).
(b) In situations where there may be returns or variable consideration, revenue on sales subject to
reversal may not be recognized (constrained). Therefore, companies may only recognize if (1)
they have experience with similar contracts and are able to estimate the returns and/or variable
consideration and (2) based on experience, they do not expect a significant reversal of revenue
previously recognized.
To account for the sale of products with a right of return (and for some services that are provided
subject to a refund), the seller should recognize all of the following.
1. Revenue for the transferred products in the amount of consideration to which the seller is
reasonably assured to be entitled (considering the products expected to be returned).
2. An asset (and corresponding adjustment to cost of sales) for its right to recover products
from the customer on settling the refund liability. However, in this situation, the magazines
will not be returned and an asset will not be recorded.
If recorded gross at point of sale, no liability or asset is recorded unexercised returns until the end
of the accounting period.
(c) Collectibility refers to a customer’s credit risk—that is, the risk that a customer will be unable to
pay the amount of consideration in accordance with the contract. Any time a company sells a
product or performs a service on account, a collectibility issue occurs. The amount recognized is
not adjusted for customer credit risk. Rather, companies report the revenue gross and then
present an allowance for any impairment due to bad debts (recognized initially and subsequently
in accordance with the respective bad debt guidance) prominently as an operating expense in the
income statement.
If significant doubt exists at contract inception about collectibility, it often indicates that the parties
are not committed to their obligations. As a result, it may mean that the existence of a contract is
not met.
LO: 2, 3, Bloom: AP, Difficulty: Complex, Time: 35-45, AACSB: Reflecting thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
CA 18.6
(a) Cash receipts based on subscription sales should initially be credited to Unearned Sales
Revenue. As each monthly issue is distributed, Unearned Sales Revenue is reduced (Dr.) and Sales
Revenue is recognized (Cr.). A problem results because of the unqualified guarantee for a full
refund. Certain companies experience such a high rate of returns to sales that they find it
necessary to postpone revenue recognition (revenue recognized is constrained) until the return
privilege has substantially expired. Cutting Edge is expecting a 25% return rate and it will not expire
until the new subscriptions expire. Therefore, companies may only recognize revenue on sales
with return privileges if (1) they have experience with similar contracts and are able to estimate
the returns, and (2) based on experience, they do not expect a significant reversal of revenue
previously recognized.
CA 18.6 (Continued)
(b) To account for the sale of products with a right of return (and for some services that are provided
subject to a refund), the seller should recognize all of the following.
1. Revenue for the transferred products in the amount of consideration to which the seller is
reasonably assured to be entitled (considering the products expected to be returned).
2. An asset (and corresponding adjustment to cost of sales) for its right to recover inventory
from the customer and settling the refund liability.
If recorded gross at point of sale, no liability or asset is recorded for expected returns until the
end of the accounting period.
(c) Since the atlas premium may be accepted whenever requested, it is necessary for Cutting Edge
to record a liability (a performance obligation) for estimated premium claims outstanding.
According to GAAP, the estimated premium claims outstanding is a liability which should be
reported since it can be readily estimated [60% of the new subscribers X (cost of atlas − $2)] and
its occurrence is probable. As the new subscription is obtained, Cutting Edge should record the
estimated liability (Refer to Chapter 13) as follows:
Premium Expense ....................................................................................... XXX
Premium Liability ................................................................................. XXX
Upon request for the atlas and payment of $2 by the new subscriber, Cutting Edge should record:
Cash ............................................................................................................ XXX
Premium Liability ......................................................................................... XXX
Inventory of Premiums......................................................................... XXX
(d) The current ratio (Current Assets ÷ Current Liabilities) will change, but not in the direction Embry
thinks. As subscriptions are obtained, current assets (cash or accounts receivable) will increase
and current liabilities (unearned revenue) will increase by the same amount. In addition, the
liabilities for estimated premium claims outstanding will increase with no change in current
assets. Consequently, the current ratio will decrease rather than increase as proposed. Naturally
as the revenue is recognized, these ratios will become more favorable. Similarly, the debt to
equity ratio will not be decreased due to the increase in liabilities.
LO: 1, 2, 3, Bloom: C, AN, Difficulty: Complex, Time: 35-45, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
CA 18.7
(a) A company recognizes revenue in the accounting period when a performance obligation is
satisfied—the revenue recognition principle. A key element of the revenue recognition principle is
that a company recognizes revenue to depict the transfer of goods or services to customers in an
amount that reflects the consideration that it receives, or expects to receive, in exchange for
those goods or services.
The concept of change in control is the deciding factor in determining when a performance
obligation is satisfied. The customer controls the product or service when it has the ability to
direct the use of and obtain substantially all the remaining benefits from the asset or service.
Control also includes the customer’s ability to prevent other companies from directing the use of,
or receiving the benefit, from the asset or service. Indicators of change in control include:

CA 18.7 (Continued)
Companies satisfy performance obligations either at a point in time or over a period of time.
Companies recognize revenue over a period of time if one of the following three criteria is met.
(b) Griseta & Dubel Inc., in effect, collects cash for merchandise credits far in advance of when
merchants furnish the goods. Thus, this is an example of upfront payments. In addition, since the
data indicate that about 5 percent of the credits sold will never be redeemed, it also has revenue
from this source unless these credits are redeemed. Griseta & Dubel’s revenues are recognized
when the performance obligation is met when credits are redeemed.
The performance obligation is to deliver premiums (tickets and other items) in the future. This
revenue is recognized when the bonus points sales occur. Reasonable estimation is crucial to
revenue recognition. Griseta and Dubel uses historical bonus points data to estimate the amount
of consideration to allocate to the future bonus point revenue.
(c) Griseta & Dubel’s major asset (in terms of data given in the question) would be its inventory of
premiums. The major account with a credit balance would be performance obligation to deliver
premiums to merchants in the future.
LO: 1, 2, 3, Bloom: AN, Difficulty: Moderate, Time: 25-30, AACSB: Reflective thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
CA 18.8
(a) Honesty and integrity of financial reporting versus higher corporate profits are the ethical issues.
Nies’s position represents GAAP. The financial statements should be presented fairly and that
will not be the case if Avery’s approach is followed. External users of the statements such as
investors and creditors, both current and future, will be misled.
(b) Nies should insist on statement presentation in accordance with GAAP. If Avery will not accept
Nies’s position, Nies will have to consider alternative courses of action, such as contacting higher-
ups at Midwest, and assess the consequences of each.
LO: 1, 2, 3, Bloom: AN, Difficulty: Moderate, Time: 20-25, AACSB: Reflective thinking, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
*CA 18.9
(a) Widjaja Company should recognize revenue as it performs the work on the contract (the
percentage-of-completion method) because it meets the criteria for revenue recognition over
time.
(b) Progress billings would be accounted for by increasing accounts receivable and increasing progress
billings on contract, a contra-asset that is offset against the Construction in Process account. If
the Construction in Process account exceeds the Billings on Construction in Process account, the
two accounts would be shown net in the current assets section of the balance sheet. If the
Billings on Construction in Process account exceeds the Construction in Process account, the
two accounts would be shown net, in most cases, in the current liabilities section of the balance
sheet.
(c) The income recognized in the second year of the four-year contract would be determined using
the cost-to-cost method of determining percentage of completion as follows:
1. The estimated total income from the contract would be determined by deducting the estimated
total costs of the contract (the actual costs to date plus the estimated costs to complete) from
the contract price.
2. The actual costs to date would be divided by the estimated total costs of the contract to arrive
at the percentage completed. This would be multiplied by the estimated total income from the
contract to arrive at the total income recognizable to date.
3. The income recognized in the second year of the contract would be determined by deducting the
income recognized in the first year of the contract from the total income recognizable to date.
(d) Earnings per share in the second year of the four-year contract would be higher using the
percentage-of-completion method instead of the completed-contract method because income
would be recognized in the second year of the contract using the percentage-of-completion
method, whereas, no income would be recognized in the second year of the contract using the
completed-contract method.
LO: 5, 6, Bloom: AN, Difficulty: Moderate, Time: 20-25, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
FINANCIAL REPORTING PROBLEM
(a) 2017 Net sales: $65,058 million.
(b) P&G’s net sales decreased from $65,299 million to $65,058 million or
$214 million ($65,299 - $65,058) from 2016 to 2017, or 0.37%
($214/$65,299). Net sales decreased from $70,749 million to $65,299
million or $5,450 ($70,749 - $65,299) from 2015 to 2016, or 7.7%
($5,450/$70,749).
(c) Sales are recognized when revenue is realized or realizable and has
been earned. Revenue transactions represent sales of inventory. The
revenue recorded is presented net of sales and other taxes we collect
on behalf of governmental authorities. The revenue includes shipping
and handling costs, which generally are included in the list price to the
customer. Our policy is to recognize revenue when title to the product,
ownership and risk of loss transfer to the customer, which can be on
the date of shipment or the date of receipt by the customer. A
provision for payment discounts and product return allowances is
recorded as a reduction of sales in the same period that the revenue is
recognized.
(d) Trade promotions, consisting primarily of customer pricing allowances,

merchandising funds and consumer coupons, are offered through
various programs to customers and consumers. Sales are recorded
net of trade promotion spending, which is recognized as incurred,
generally at the time of the sale. Most of these arrangements have
terms of approximately one year. Accruals for expected payouts under
these programs are included as accrued marketing and promotion in
the accrued and other liabilities line item in the Consolidated Balance
Sheets.
The policies for trade promotions are consistent with revenue recogni-
tion criteria and with accrual accounting concepts. Trade promotion
expenses are recorded in the period of the sales, and as a result are
matched with the revenue they help generate. Any amounts that benefit
future periods are accrued and reported as liabilities to be matched
with revenues in future periods when paid out.
Note to Instructor: P&G did not adopt the new standards as of its 2017
annual report
COMPARATIVE ANALYSIS CASE
(a) For the year 2017, Coca-Cola reported net operating revenues of
$35,410 million and PepsiCo reported net revenue of $63,525 million.
Coca-Cola’s revenues decreased by $6,453c million ($35,410 - $41,863)

or 15.41% ($6,453/$41,863) from 2016 to 2017 while PepsiCo’s revenues
increased by $726 million ($63,525 - $62,799) or by 1.16%
($726/$62,799) from 2016 to 2017.
(b) Revenue Recognition Policies
Coca-Cola provided the following revenue recognition note (Note 1:

Business and Summary of Significant Accounting Policies – p. 79)
Our Company recognizes revenue when persuasive evidence of an
arrangement exists, delivery of products has occurred, the sales
price charged is fixed or determinable, and collectibility is reasonably
assured. For our Company, this generally means that we recognize
revenue when title to our products is transferred to our bottling
partners, resellers or other customers. In particular, title usually
transfers upon shipment to or receipt at our customers’ locations,
as determined by the specific sales terms of the transactions. Our
sales terms do not allow for a right of return except for matters
related to any manufacturing defects on our part.
COMPARATIVE ANALYSIS CASE (Continued)
PepsiCo’s Revenue Recognition note [Note 2 (p. 72) – Our Significant

Accounting Policies] is as follows:
We recognize revenue upon shipment or delivery to our customers
based on written sales terms that do not allow for a right of return.
However, our policy for DSD and certain chilled products is to
remove and replace damaged and out-of-date products from store
shelves to ensure that consumers receive the product quality and
freshness they expect. Similarly, our policy for certain warehouse
distributed products is to replace damaged and out-of-date
products.
As a result, we record reserves based on estimates, for anticipated
damaged and out-of-date products.
For additional unaudited information on our revenue recognition
and related policies, including our policy on bad debts, see “Our
Critical Accounting Policies” in Management’s Discussion and
Analysis of Financial Condition and Results of Operations (pp. 45 -
51.) We are exposed to concentration of credit risk from our
customers, including Wal-Mart. In 2014, sales to Wal-Mart
(including Sam’s) represented approximately 12% of our total net
revenue, including concentrate sales to our independent bottlers,
which are used in finished goods sold by them to Wal-Mart. We
have not experienced credit issues with these customers.
The policies are similar.
(c) In 2017, Coca Cola experienced significant amounts of revenue in

Europe middle east and Africa, $7,374 million; Latin America, $4,029
million; and Asia Pacific $5,176 million (Note 19 – Operating Segments
- p. 141). In PepsiCo reported net revenues in Russia, $3,232; Mexico,
$3,650 million; Canada, $2,691 million; United Kingdom, $1,650; Brazil,
$1,427; all other countries, $14,329 (Note 1, p. 87.)
In 2017, Coca-Cola’s U.S. revenues were 41.58% of total revenues
($14,727/$35,410a) (p. 140), while PepsiCo’s U.S. revenues were 57.53% of
total revenues. ($36,546/$63,525b) - (Note 1, p. 87.)
FINANCIAL STATEMENT ANALYSIS CASE
WESTINGHOUSE ELECTRIC CORPORATION

(a) For product sales, Westinghouse Electric Corporation uses the date of
delivery, point of sale, basis for revenue recognition. For services ren-
dered, Westinghouse uses the “when services are complete and billable
method” of recognizing revenues. For nuclear steam supply system
orders (approximately 5 years in duration) and other long-term construc-
tion projects, Westinghouse uses the percentage-of-completion method
for recognizing revenue. And, WFSI revenues are recognized on the
accrual basis, except when accounts become delinquent for two or more
periods; then income is recognized only as payments are received; that
is, on the cash basis.
(b) For the most part, companies recognize revenue at the point of sale
because that is when the performance obligation is satisfied. Under
certain circumstances, companies recognize revenue over time. The
most notable context in which revenue is recognized over time is long-
term construction contract accounting. Long-term contracts
frequently provide that the seller (builder) may bill the purchaser at
intervals, as it reaches various points in the project.
A company satisfies a performance obligation and recognizes revenue

over time if at least one of the following three criteria is met:
1. The customer simultaneously receives and consumes the benefits of
the entity’s performance as the entity performs.
2. The company’s performance creates or enhances an asset (for
example, work in process) that the customer controls as the asset is
created or enhanced; or
3. The company’s performance does not create an asset with an
alternative use. For example, the asset cannot be used by another
customer. In addition to this alternative use element, at least one of the
following criteria must be met:
(a) Another company would not need to substantially re-perform the
work the company has completed to date if that other company were
to fulfill the remaining obligation to the customer.
(b) The company has a right to payment for its performance
completed to date, and it expects to fulfill the contract as promised.
Financial Statement Analysis Case (Continued)
Therefore, if criterion 1 or 2 is met, then a company recognizes
revenue over time if it can reasonably estimate its progress toward
satisfaction of the performance obligations. That is, it recognizes
revenues and gross profits each period based upon the progress of
the construction—referred to as the percentage-of-completion method.
The rationale for using percentage-of-completion accounting is that
under most of these contracts the buyer and seller have enforceable
rights. The buyer has the legal right to require specific performance on
the contract. The seller has the right to require progress payments that
provide evidence of the buyer’s ownership interest. As a result, a
continuous sale occurs as the work progresses. Companies should
recognize revenue according to that progression.
The right to payment for performance completed to date does not need
to be for a fixed amount. However, the company must be entitled to an
amount that would compensate the company for performance
completed to date (even if the customer can terminate the contract for
reasons other than the company’s failure to perform as promised).
Alternatively, if the criteria for recognition over time are not met (e.g.,
the company does not have a right to payment for work completed to
date), the company recognizes revenues and gross profit at a point in
time, that is, when the contract is completed. This approach is referred
to as the completed-contract method.
(c) WFSI is probably a wholly-owned finance subsidiary of Westinghouse
that provides financing for customers of Westinghouse. The character
of the revenue being recognized by WFSI is interest revenue on notes
receivable. So long as accounts are current, payments are being received,
interest and principal are recognized in each payment. When two pay-
ments are missed, the account is declared delinquent and interest is
no longer accrued. On delinquent accounts, it is probable that if and as
cash is collected, the cost-recovery method is applied; that is, interest
is recognized only after all principal is recovered.
LO: 1, 2, 3, Bloom: AN, Difficulty: Moderate, Time: 15-20, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
ACCOUNTING, ANALYSIS, AND PRINCIPLES
Accounting
Sales revenue ............................................................................... $9,500,000

Expenses ...................................................................................... 7,750,000
1,750,000
Net income from pump bundle*.................................................. 24,000
Net income on consignment sales** .......................................... 120,000
Net income.................................................................................... $1,894,000
*Since the sump-pump and installation bundle are delivered at the same
time, there are two performance obligations. Any discount is applied to
the pump/installation bundle. The total transaction price of $54,600 is
allocated between the equipment and installation ($43,800) and the
service contract [$10,800 ($10 X 36 X 30)].
Sales revenue ...................................................... $43,800

Cost of goods sold [30 X ($540 + $150)] ............ 20,700
Gross profit ..................................................... $23,100
Service revenue [($10,800 ÷ 36) X 10 months] $3,000

Expenses [($7,560*** ÷ 36) X 10 months] .......... 2,100
Income on service contract ........................... 900
Net income on this arrangement ................... $24,000
**Sales revenue (200 X $1,200) ........................... $240,000

Cost of goods sold (200 X $540) ........................ 108,000
Gross profit ..................................................... $132,000
Consignment expense ($240,000 X .05) ............ 12,000

Net Income on this arrangement ................... $120,000
***$7 X 36 X 30
ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
Analysis
Net income ................................................................................... $1,894,000

Depreciation expense ................................................................. 175,000
Increase in working capital ........................................................ (250,000)
Net cash flow from operating activities .................................... 1,819,000
Less: Capital expenditures ........................................................ 500,000
Dividends .......................................................................... 120,000
Free cash flow ............................................................................. $1,199,000
Principles
Under the 5-step model, a company first identifies the contract with
customer(s); identifies the separate performance obligations in the
contract; determines the transaction price; allocates the transaction price
to separate performance obligations, and recognizes revenue when each
performance obligation is satisfied.
As indicated, a company satisfies its performance obligation when the

customer obtains control of the good or service. Companies satisfy
performance obligations either at a point in time or over a period of time.
Companies recognize revenue over a period of time if (1) the customer
controls the asset as it is created or the company does not have an
alternative use for the asset, and (2) the company has a right to payment.
In the case of the sump-pump sales, the customer has control of the
pumps when the pumps are delivered and installed. The service contract
revenue is recognized over time as Diversified provides the services.
With respect to the consignment sales, Menards is acting as an agent;

revenue on those sales is recognized when the customers purchase (have
control of) the pumps.
Using control as a key element contributes to relevance because it

indicates the cash flows that the seller is entitled to as a result of the
revenue arrangement, which enhances the predictive value of the revenue
information.
ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
Faithful representation may be sacrificed for situations in which companies

must allocate the transaction price to more than one performance
obligation in a contract. If an allocation is needed, the transaction price
allocated to the various performance obligations is based on their relative
fair value. In addition, faithful representation could be affected when
companies must estimate returns, warranty obligations, and other
elements that affect the transaction price. These estimates could be
subject to error or bias.
LO: 1, 2, 3, Bloom: AN, Difficulty: Complex, Time: 20-25, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
CODIFICATION EXERCISES
CE18.1
(a) Customer - A user or reseller. A party that has contracted with an entity to obtain goods or
services that are an output of the entity’s ordinary activities in exchange for consideration.
(b) Performance Obligation - A promise in a contract with a customer to transfer to the customer
either:
a. A good or service (or a bundle of goods or services) that is distinct
b. A series of distinct goods or services that are substantially the same and that have the same
pattern of transfer to the customer.
(c) Standalone Selling Price - The price at which an entity would sell a promised good or service
separately to a customer.
(d) Transaction Price - The amount of consideration to which an entity expects to be entitled in
exchange for transferring promised goods or services to a customer, excluding amounts
collected on behalf of third parties.
LO: 1, 2, 3, Bloom: K, Difficulty: Simple, Time: 12-15, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
CE18.2
According to FASB ASC 606-10-25-15:
An entity shall account for a contract modification as a separate contract if both of the following
conditions are present:
a. The scope of the contract increases because of the addition of promised goods or services that
are distinct (in accordance with paragraphs 606-10-25-18 through 25-22).
b. The price of the contract increases by an amount of consideration that reflects the entity’s
standalone selling prices of the additional promised goods or services and any appropriate
adjustments to that price to reflect the circumstances of the particular contract. For example, an
entity may adjust the standalone selling price of an additional good or service for a discount that
the customer receives, because it is not necessary for the entity to incur the selling-related costs
that it would incur when selling a similar good or service to a new customer.
CE18.3
According to FASB ASC 606-10-32-10:
Refund Liabilities
An entity shall recognize a refund liability if the entity receives consideration from a customer and
expects to refund some or all of that consideration to the customer. A refund liability is measured at the
amount of consideration received (or receivable) for which the entity does not expect to be entitled (that
is, amounts not included in the transaction price). The refund liability (and corresponding change in the
transaction price and, therefore, the contract liability) shall be updated at the end of each reporting
period for changes in circumstances. To account for a refund liability relating to a sale with a right of
return, an entity shall apply the guidance in paragraphs 606-10-55-22 through 55-29.
LO: 3, Bloom: K, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
CE18.4
According to FASB ASC 606-10-32-36 to 38
Allocation of a Discount
36 - A customer receives a discount for purchasing a bundle of goods or services if the sum of the
standalone selling prices of those promised goods or services in the contract exceeds the
promised consideration in a contract. Except when an entity has observable evidence in
accordance with paragraph 606-10-32-37 that the entire discount relates to only one or more, but
not all, performance obligations in a contract, the entity shall allocate a discount proportionately
to all performance obligations in the contract. The proportionate allocation of the discount in
those circumstances is a consequence of the entity allocating the transaction price to each
performance obligation on the basis of the relative standalone selling prices of the underlying
distinct goods or services.
37 - An entity shall allocate a discount entirely to one or more, but not all, performance obligations in
the contract if all of the following criteria are met:
a. The entity regularly sells each distinct good or service (or each bundle of distinct goods or
services) in the contract on a standalone basis.
b. The entity also regularly sells on a standalone basis a bundle (or bundles) of some of those
distinct goods or services at a discount to the standalone selling prices of the goods or
services in each bundle.
c. The discount attributable to each bundle of goods or services described in (b) is substantially
the same as the discount in the contract, and an analysis of the goods or services in each
bundle provides observable evidence of the performance obligation (or performance
obligations) to which the entire discount in the contract belongs.
38 - If a discount is allocated entirely to one or more performance obligations in the contract in

accordance with paragraph 606-10-32-37, an entity shall allocate the discount before using the
residual approach to estimate the standalone selling price of a good or service in accordance
with paragraph 606-10-32-34(c).
LO: 3, Bloom: K, Difficulty: Moderate, Time: 10-12, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
CODIFICATION RESEARCH CASE
(a) Sale with a Right of Return is addressed at FASB ASC 606-10-55.
(b) According to FASB ASC 606-10-55-22 related to right of return:
In some contracts, an entity transfers control of a product to a

customer and also grants the customer the right to return the product
for various reasons (such as dissatisfaction with the product) and
receive any combination of the following:
a. A full or partial refund of any consideration paid
b. A credit that can be applied against amounts owed, or that will be

owed, to the entity
c. Another product in exchange.
Bill-and-Hold: According to FASB ASC 606-10-55-81: A bill-and-hold

arrangement is a contract under which an entity bills a customer for a
product but the entity retains physical possession of the product until
it is transferred to the customer at a point in time in the future. For
example, a customer may request an entity to enter into such a
contract because of the customer’s lack of available space for the
product or because of delays in the customer’s production schedules.
(c) According to FASB ASC 606-10-55-23:
To account for the transfer of products with a right of return (and for
some services that are provided subject to a refund), an entity should
recognize all of the following:
a. Revenue for the transferred products in the amount of

consideration to which the entity expects to be entitled (therefore,
revenue would not be recognized for the products expected to be
returned)
b. A refund liability
CODIFICATION RESEARCH CASE (Continued)
c. An asset (and corresponding adjustment to cost of sales) for its

right to recover products from customers on settling the refund
liability.
(d) According to FASB ASC 606-10-55-82 to 84:
82 - An entity should determine when it has satisfied its performance

obligation to transfer a product by evaluating when a customer
obtains control of that product (see paragraph 606-10-25-30). For
some contracts, control is transferred either when the product is
delivered to the customer’s site or when the product is shipped,
depending on the terms of the contract (including delivery and
shipping terms). However, for some contracts, a customer may
obtain control of a product even though that product remains in
an entity’s physical possession. In that case, the customer has
the ability to direct the use of, and obtain substantially all of the
remaining benefits from, the product even though it has decided
not to exercise its right to take physical possession of that
product. Consequently, the entity does not control the product.
Instead, the entity provides custodial services to the customer
over the customer’s asset.
83 - In addition to applying the guidance in paragraph 606-10-25-30,

for a customer to have obtained control of a product in a bill-and-
hold arrangement, all of the following criteria must be met:
a. The reason for the bill-and-hold arrangement must be

substantive (for example, the customer has requested the
arrangement).
b. The product must be identified separately as belonging to

the customer.
c. The product currently must be ready for physical transfer to

the customer.
d. The entity cannot have the ability to use the product or to

direct it to another customer.
CODIFICATION RESEARCH CASE (Continued)
84 - If an entity recognizes revenue for the sale of a product on a bill-

and-hold basis, the entity should consider whether it has
remaining performance obligations (for example, for custodial
services) in accordance with paragraphs 606-10-25-14 through
25-22 to which the entity should allocate a portion of the
transaction price in accordance with paragraphs 606-10-32-28
through 32-41.
LO: 1, 2, 3, Bloom: C, Difficulty: Moderate, Time: 20-25, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving

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CHAPTER 18

ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)

3. Performance Obligations 9, 10, 11 5, 19, 20

4. Transaction Price 8, 12, 18 6, 7, 8 4, 6, 7 4, 5 1

5. Variable Consideration; 8, 13, 14, 5, 6, 7, 8, 9, 4, 5 3, 4, 6, 7, 5

6. Allocate transaction price to 11, 12,18, 13, 14, 15 1, 2, 3, 4, 5

8. Presentation, Contract 30, 31, 19, 21 28, 29, 30, 6, 7

*10. Franchising. 38, 39 25 38, 39 12

*This material is dealt with in an Appendix to the chapter.

Brief Concepts for

4. Describe 30, 31, 32, 19, 21 28, 29, 30, 2, 3, 4, 5 6, 7

*5. Apply the 34, 35, 36 22 33, 34, 35, 9, 10, 11 9

*6. Apply the 34, 35 23 36, 37 9, 10, 11

*7. Identify the proper 37 24 10, 11

*8. Explain revenue 38, 39 25 38, 39 12

P18.1 Allocate Transaction Price, Upfront Fees. Moderate 30–35

CA18.1 Five-Step Revenue Process. Moderate 20–30

4. The five steps in the revenue recognition process are:

1. Identify the contract(s) with customers.

6. Revenues are recognized generally as follows:

(a) Revenue from selling products—date of delivery to customers.

December 15, 2020

Notes Receivable ................................................ 5,000

Cost of Goods Sold ............................................. 6,500

9. A performance obligation is a promise in a contract to provide a product or service to a customer.

(a) The reason for the bill-and-hold arrangement must be substantive.

26. In a principal-agent relationship, the principal’s performance obligation is to provide goods or

28. The two types of warranties are:

The percentage-of-completion method recognizes revenues, costs, and gross profit as a

BRIEF EXERCISE 18.1

BRIEF EXERCISE 18.2

June 15, 2020

Accounts Receivable ......................................................... 2,000

Cost of Goods Sold ........................................................... 1,300

July 15, 2020

Cash .................................................................................... 2,000

BRIEF EXERCISE 18.3

There is one performance obligation in this situation, which is the

Three performance obligations exist in this contract—manufacture of the 3-

BRIEF EXERCISE 18.5

Ismail accounts for the bundle of goods and services as a single

The transaction price should include management’s estimate of the amount

Completion Date Probability Expected Value

Thus, the total transaction price is $ 1,127,500 based on the probability-

BRIEF EXERECISE 18.7

(b) When there is limited information with which to develop a reliable

BRIEF EXERECISE 18.8

(a) Groupo would recognize revenue of $1,000,000 at delivery.

(b) Groupo would recognize revenue of $800,000 at the point of sale.

Notes Receivable ...................................................... 11,000

Cost of Goods Sold ................................................. 6,000

Revenue Recognized in 2020

Sales revenue ............................................................ $ 10,000

BRIEF EXERCISE 18.10

Parnevik should record revenue of $660,000 on March 1, 2020, which is the

Notes Receivable .............................................. 1,062,937

Cost of Goods Sold ..................................... ….. 400,000

December 31, 2020

Discount on Notes Receivable ........................ 55,000

As a practical expedient, companies are not required to reflect the time

BRIEF EXERCISE 18.11

January income ......................................................... $ 0

BRIEF EXERCISE 18.12

Manual reduces revenue by $6,600 ($110,000 X .06) because it is probable